Common investment advice we hear time and time again is to buy a house. There are many reasons for this, including the fact that a home’s value usually appreciates over time, providing long-term financial stability.
But what about investing in a rental property instead of your principal residence? Does the advice about buying property still apply? Well, the answer is nuanced and varies depending on your financial situation. Assessing if a rental property is a sound investment involves reviewing a long list of pros and cons. We will review the most important ones in this article, starting with the pros.
The Pros of Investing in a Rental Property
Investing in rental properties offers various advantages, making it an appealing option. Here are a few reasons why it might work for you.
Real Estate Is Generally a Safe Investment
Real estate is considered a sound investment option because it allows you to invest in something that can be an effective hedge (or protection) against inflation. Property values respond to the overall market, keeping pace with inflation and allowing you to retain a valuable asset for decades.
Purchasing real estate, whether as a rental or your own home, diversifies your investment portfolio, and a diversified portfolio is ideal for making the most of your investments. Currently, interest rates are being cut, making it a good time to enter the real estate market as borrowing costs are lower.
You’ll Earn a Monthly Income
Once you have tenants for your rental property, you’ll be earning an income each month from them through their rent payments. Depending on what your down payment was, some of this amount will go to covering the property taxes, mortgage payments, and other expenses related to property maintenance, but if you balance it well, you can walk away with a little more cash in your pocket.
Rental income is often considered passive, meaning you earn from upfront work but with little to no day-to-day work. With a passive monthly income, you’re increasing your cash flow without sacrificing all your time, and this means you’ll have more time and money to take part in the things in life that bring you the most joy, whether that’s trying to find the newest sweeps casinos or travelling abroad.
You’re Eligible for Tax Breaks
When you own a rental property, you can offset some of its expenses through tax breaks or benefits. You can deduct expenses like insurance, property repairs, some property improvements, and interest paid on the mortgage. These deductions allow you to reduce how much you owe on your yearly tax return, significantly improving your cash flow and ability to reach your financial goals.
The Cons of Investing in a Rental Property
As with any investment, there are several drawbacks to investing in rental properties that you should carefully consider before making such major financial decisions.
Property Costs and Expenses
Buying a rental property is a costly endeavor. Like buying a primary residence, purchasing a rental property requires a down payment, which can be substantial. You may need to use savings or borrow money for this payment. Adding to this cost are expenses like property taxes, the mortgage, closing costs, repairs, maintenance, insurance, and more. Before buying a rental, assess how you’ll pay and the feasibility of making a profit.
You should also keep in mind that rentals will sit vacant at some points, and during these times, all the expenses will come out of your pocket.
Real Estate Is Not a Liquid Asset
To access money from your real estate investment, you must go through the selling process, which can be lengthy, even in the best of markets. This means if you need quick access to your investment, your rental property may not help, or you might rush to sell and get less value than you would have without the constraint. If you’re looking for an investment with a quick turnaround, this isn’t the best option.
Possibility of Problem Tenants
While many excellent tenants keep up with their rent, keep their home tidy, and let you know if there are any problems with the property, there are also those who do the opposite. These problem tenants can be a significant risk for property owners, and even screening rental applicants doesn’t always prevent your tenant from ending up behind on rent. There are also problem tenants who can damage the property and cost you a great deal of money for repairs.
Being a Landlord May Not Be the Right Fit for You
Before buying a rental property, assess your comfort level with being a landlord. You’ll have many responsibilities, some of which you may not be comfortable with, like raising rent or ensuring on-time payments. There are options like property management companies that can help you with some of the responsibilities, but these will impact how much you earn for your property as they become another expense.
Conclusion: Are Rental Properties Worth the Investment?
If you have the means or ability to borrow money, are interested in being a landlord, and are comfortable with some risk, then yes, rental properties are worth the investment. Like owning your home, owning a rental property will help diversify your portfolio and provide you with a relatively valuable asset through market fluctuations. Plus, a rental property has the benefit of bringing in a monthly income that will help you reach other financial goals, which is a pro that’s difficult to discount.
