The Highs And Lows of Owning Rental Property
Many people claim that owning rental property is a big part of the American Dream. Well, that depends on how you define the dream. While owning rental property has some financial advantages, it also has substantial downsides which frequently make it the American Nightmare. Read on to see four advantages and seven disadvantages of owning rental property.
Advantages of Owning a Rental Property
Positive cash flow. If your rental income each month exceeds your expenses, then you make a profit. Small rental properties normally profit a few hundred dollars per month, so over one year, you might see about $4,000 in net income. The lucky owners of rental property see positive cash flows much higher when the units are rented out to dependable, rent-paying tenants. So, monthly profits are one advantage to owning rental property.
Owning rental property means that as the value of real estate increases in a given area, you have more equity and can sell for a profit or have available cash as a heloc (home equity line of credit). If you purchased the rental property for $200,000 ten years ago, and now the market says it’s worth $300,000, then you have potential to sell it for a tidy sum of profit.
The tax benefits of owning rental property are significant. Besides the ability to deduct the mortgage interest from your income, you can also deduct property taxes and operating expenses.
Sweat equity is often a terrific way to increase the value of your property because you’re not having to pay others to do all the work. When you paint the apartments yourself, you are not only making them more rentable, but also you’re raising the market value of the property. Installing new siding, roofing, or plumbing also affects the appraisal of your property. More attractive properties draw higher rents and more appreciation.
Disadvantages to Owning a Rental Property
If your mortgage payment is higher than the rental income, you have a negative cash flow, which at some point, has to be compensated for in making the property profitable. Without positive cash flow, it’s hard to maintain the property and make repairs. If you have other income, you may be able to hang on and work to make the property more attractive to renters so you can raise the rent and keep the apartments rented.
You may find that in your area, there are certain times of the year when vacancies rise. You have to plan for them and be resourceful in mitigating the issue so you don’t go bankrupt. High vacancies kill investment properties.
Purchasing a rental property when the market is high is risky because the housing market could burst and turn your property upside down in debt to value ratio. For example, in 2007, investors bought properties when the market was strong, but in 2008, the real estate market came crashing down, making the properties worth less than their purchase prices. This makes it very difficult to charge enough rent to cover the mortgage.
Sometimes HOA fees, insurance rates, and property taxes increase, cutting into your bottom line of profits.
Choosing bad tenants brings the nightmares. It’s not easy to predict which people will take care of the place and pay rent on time. Some people trash the apartment, leaving you with a lot of work to make it rentable again. Some tenants pay rent late or not at all, which forces you to deal with the headaches of less cash flow and laws of eviction.
Even the nicest of rental properties require upkeep. You need to perform or supervise the maintenance of landscape and interior furnishings, plumbing, and electrical. Owning rental property takes time and money to keep them attractive and in good working order.