Here at Mashvisor, we tend to focus on the positive aspects of owning a rental property business. After all, some of us are rental property owners and we host a resource site for fellow real estate investors and business owners. Although we do see the glass as half-full, there are some negatives to rental investing. In this story, Mashvisor will examine the pros and cons of rental property.
We will also add some suggestions on how to make the most of the pros and minimize the cons of being a rental property investor. Rental property investing can be a very satisfying endeavor. But it is best to go into the field with one’s eyes open. Here is Mashvisor’s guide to the pros and cons of rental property investing.
Financial Pros to Owning Rental Property
Let’s start our examination of the pros and cons of owning rental property with some obvious financial pros. First up is cash flow. Any properly run rental property business will provide a source of income. Whether a real estate investor has residential units, vacation rental property, or makes a living owning an Airbnb business, the monthly cash flow should be positive.
As an investment, this sets a rental property business apart from investing in stocks. Stocks come with many rules related to the tax implications of selling shares for income. Similarly, a business related to purchasing homes for resale, particularly flipping homes, is tricky when it comes to cash flow for tax reasons.
Owning a rental property business also builds wealth in another way. The investment property should gain equity value over time. So, in addition to steady cash flow, the business is building equity slowly but surely as time passes. This is sometimes referred to as passive investing.
One big pro to rental property investing is the tax situation. Almost every expense is deductible from earnings, and the value of the investment property is also a deduction over three decades. The upshot is, many rental property owners see big tax advantages to such a business, particularly in the early years of the business.
Lifestyle Pros to Owning Rental Property
Although some investors in rental property do so as a full-time job, many owners also have other careers. Owning rental property can be a great passive investment strategy. In fact, many rental property investments start out as a real estate investor’s primary residence.
One of the best perqs to starting out in the rental property business is the owner-occupied mortgage. This special FHA mortgage allows an investor to get a great interest rate. It also is possible to use a very small down payment. This program applies to multifamily investment properties. Many real estate investors start out using this proven entry method.
The ability to “passively” invest in real estate and manage a rental business while also working is a big pro. Rental property management is sometimes very busy work. However, at other times, there can be plenty of time to do other work. If you are a gig worker in some other field (like your author), it can work out perfectly. Two income streams are better than one in many ways.
Cons of Rental Property Investing – Uncontrollable Factors
Any marketing plan must account for uncontrollable factors in the market. When we look at the pros and cons of owning rental property, this is also true. This year, the market is disrupted by a pandemic. In 2008 and 2009, it was a historic stock market crash tied to a housing crisis. One of the cons of rental property ownership is this type of disruption.
It is hard to know where to begin when describing this con. Perhaps the hardest part will be managing cash flow when renters with good intentions cannot pay their rent. With new eviction and lease controls mandated by the government, the few tools to manage a unit with no rental payments are off the table. This disruption means you may not be able to pay your bills and could put you at financial risk.
In addition, the real estate market for new purchases and sales is in shambles. Hopefully, this will be temporary. Right now, realtors, lawyers, and government, all of whom are required to do their part, are scrambling. The situation is changing day by day and listing, selling, and closing on an investment property is much more difficult than in past years. One silver lining may be some distressed property purchase opportunities later in the year for those investors with cash.
Rental Property Challenge – Tenant Issues
Managing tenants is one of the most challenging aspects of owning and managing rental property. My personal experience is that nearly all tenants are honorable people. It can be an enriching experience to provide a quality home to a good person, persons, or family. However, the challenge is dealing with the bad apples.
The government is not your friend in tenant screening. In fact, the federal government excludes certain types of tenants but forces you as a private party from doing so. The situation is tricky and carries risk. So much so that many rental property owners outsource tenant screening. This adds unnecessary costs and is no guarantee of finding a tenant with good intentions of paying their rent.
Owning a multifamily rental also means being a referee in minor disputes between tenants. And those disputes always seem to happen on holidays and Saturday evenings. One can see this as a con without much difficulty.
Rental Property Challenge – Avoiding the Administrative Trap
Like many businesses, a rental property owner needs to focus on the main task at hand. That is finding, renovating, and filling rental properties. Add maintaining those units to the list and you have a full-time job once the unit count goes about three or four. But that is not the challenge. The real con can be falling into the trap of administrative bureaucracy.
Dealing with federal, state, county, town, and individual community rules can be one of the hidden costs of owning rental property. To ensure this does not become a full-time job in itself, one must carefully plan ahead and always be learning. The trick is to stay focused and at the same time, meet the requirement of the laws, rules, and regulations that every entity in society seems to put in your way.
Becoming a landlord was one of the smartest and most satisfying things I ever did. However, my personal advice to anyone considering this business is to understand the pros and cons of owning rental property. It is not a free ride to wealth. There is real work and real learning that has to be part of the process.
The good news is that you are not in this alone. Mashvisor has all of the tools you need to stay current on the changing market. Mashvisor is also your best source for the tools needed to find and evaluate your next rental property. To get started today, check out this special Mashvisor offer.