When you live in an area with affordable homes and high rents, buying an investment property is an attractive idea. However, being a landlord involves more than collecting a rent check every month. To make sure you’re up for the challenge of rental property ownership, learn about these pros and cons of owning a rental unit.
Pros of Owning a Rental Property
An income stream you don’t have to work 40+ hours per week to maintain? Sign me up! Owning investment properties might not let you quit your full-time job, but it’s a great way to earn a few extra thousand dollars per year.
If you do your due diligence when purchasing an investment property, your rental’s value will grow over time, adding to your personal wealth. Not only will you enjoy monthly cash flow from the property, you’ll also benefit from appreciation when you sell. Unlike primary residences, second homes aren’t eligible for the capital gains tax exclusion. However, if you live in the house for two of the five years before you sell, you can claim this valuable exclusion.
A Future Vacation Home
Are you looking forward to retirement in a few years? If so, buying an investment property and renting it out could be a smart strategy for financing a second home. Instead of budgeting for two mortgage payments or getting priced out because you waited too long to buy, you can rent out the second property until you’re retired and ready to move to the beach!
Cons of Owning a Rental Property
Before you can reap the profits of your rental property, you have a lot of expenses to pay. Mortgage payments, property taxes, homeowners insurance, and maintenance costs add up. Depending on local rental rates, your return on investment may be lower than what you’d hoped for.
Fortunately, there are steps you can take to limit your financial risk. By setting up an LLC for your rental business, you can take advantage of tax benefits and protect your assets in the event of litigation. This process is not as complicated as it seems; you can create your Massachusetts LLC through five steps and can even hire a formation service to file for you.
Not only does maintaining your rental property cost money, it takes time too. If you’re doing it all yourself, expect to devote a considerable amount of time to screening tenants, coordinating cleaning and maintenance, and responding to tenant emergencies. If the idea of being a hands-on landlord stresses you out, hire a property manager to handle it for you. When hiring a property manager, find an agency that does extensive background checks, offers 24/7 support to both you and your tenants, lays out its fees and pricing in a transparent way, and has stellar client reviews.
When you live in a house, you have eyes and ears on the property. You notice when a shingle flies off the roof in a storm, when caulk around the tub starts to degrade, and when other pressing maintenance issues pop up. But as a landlord, you can’t count on tenants to tell you when something goes wrong. As a result, you might not catch a problem until it requires an expensive repair. Over time, lapsed maintenance hurts your property value. Schedule regular inspections, allow time to complete repairs between tenants, and set out a clear security deposit policy in the lease agreement.
Purchasing a rental property can be a smart financial decision, but being a landlord isn’t for everyone. If paying for maintenance on a second home or dealing with difficult tenants strikes fear in your heart, you’re better off sticking to single home ownership. However, if you’ve weighed the pros and cons and decided that rental property ownership fits into your vision, start interviewing realtors and looking for the right investment property to make your goals a reality.