One of the most popular ways to invest in real estate is through owning rental property. Owning an apartment building or other multi-unit property allows you to rent out the space to tenants and collect a regular income. There are advantages to this type of investment but also some downsides to consider. Here we will go over the major pros and cons of owning a rental property.
Income from Rent - The obvious benefit of owning a rental is the income from rent payments. Tenants who rent the space pay you the same amount every month, so you always know what your cash flow will look like. Requiring your tenants to sign a lease also means you can guarantee that income for a certain amount of time before they have the option to renew or decline the contract for another term.
Appreciation & ROI - Over time, the value of your property is likely to grow. Depending on the level of demand in your area, it could increase drastically. At the very least, your property value will increase along with inflation and you can raise rent prices accordingly if needed. This can be an enormous benefit if you plan on selling the property in the future.
“Sweat” Equity - You can build equity in a rental property by putting in the work to maintain and improve it. We often refer to this as “sweat equity” because it’s equity built on your hard work. If you’re a do-it-yourself pro and can save money by making changes and improvements on your own, you have even more to gain.
Tenant Risk - Rental properties carry the inherent risk of damage from tenants. Unfortunately, even relatively minor damage like carpet stains, holes in the walls or broken window blinds can add up. While property owners typically charge a deposit to cover these expenses, other more expensive incidents could go above and beyond the damage budget.
Tenants can also be an expensive risk if they break their lease unexpectedly. This leaves you with a gap in your cash flow on top of any applicable damage expenses.
Property Taxes & Insurance - Your property taxes and insurance bills for a rental property can be large. This is also a constant expense regardless of whether you have tenants at the time. This can leave you in the negative if you don’t have a cushion to cover unexpected vacancies.
Repairs & Maintenance - Repairs, replacements and maintenance are guaranteed expenses when you own a rental property. The amount and severity varies but appliance replacement, carpet cleaning, paint touch-ups and all other major projects will be your responsibility as the owner. If you can’t do all the work yourself, you will need to hire professionals and often on very short notice. Sometimes you can hold tenants partially liable for things like damages, but mostly you should plan on these costs coming right out of your own pocket.
Owning a rental property can be extremely rewarding, but it’s important to understand the risks and the hard work involved. Do your research and weigh your options carefully before making the investment.
