According to the U.S. Census Bureau, the national vacancy rate for rental properties was just 6.4 percent in the fourth quarter of 2019. That means that 93.6 percent of rental properties were occupied. Clearly, there’s a healthy demand for rental housing. People need a place to live, and this solid demand creates an opportunity for those who have the means and the desire to become landlords. Do you? If you’re trying to decide, be sure to ponder the pros and cons of owning rental property before making the leap into landlordism.
The Pros and Cons of Owning Rental Property
A rental property is a residential or commercial property that you own and rent out to someone else so that they can occupy it as your tenant. Some people purchase properties with the intention of turning them into rentals. Others find themselves with a property that they don’t want to live in and opt to rent it out because they either can’t or don’t want to sell it. Regardless of the exact route that leads to the ownership of rental property, the pros and cons are often the same.
Owning Rental Property: The Positives
According to Landlordology, there are several appealing pros to owning rental property:
- It’s a source of income. Collecting rent for an occupied property provides a steady stream of income without much active effort on your part. The money can be used to pay the property’s mortgage or to fund other investments.
- It’s an investment. Property is an investment, and homes have historically gained value over time.
- There are tax benefits. If you document things properly, a rental property is a great source of tax deductions.*
- There are management options. Most people can manage their own rental properties while still working a day job. However, if you are uncomfortable with the role of landlord or are living far away from your rental property, you can hire a property manager.
Owning Rental Property: The Potential Problems
You may be tempted by their income potential, but rental properties can also present frustrating problems (source). If you’re an aspiring landlord, be sure to consider the downsides before you purchase property:
- Liquidity is lacking. At a minimum, homes normally take months to sell, and rental properties are often harder to find a buyer for.
- Upkeep is a challenge. As a landlord, the upkeep of a property is your responsibility. If something breaks, you have to fix it, and you’ll need to make arrangements for routine maintenance too. It’s also worth noting that even the best tenants are unlikely to care for a rental as well as a homeowner cares for their own home.
- Tenants can be difficult. Many landlords insist that being sued is inevitable. While some tenants are great, others are demanding, deceptive, or destructive.
- Rental properties bring additional expenses. Owning a rental property is a business endeavor, and that means that you’ll have business expenses for legal matters and accounting services, amongst other things. You’ll also need to have funds set aside to cover any gaps in occupancy or unexpected repairs.
Things to Do Before Buying a Rental Property
After weighing the pros and cons of owning rental property, you might be giving the matter serious thought. So what’s your next step? Millionacres suggests that you do a few things before buying a rental property:
- Run the numbers. Evaluate your finances to see if you’re truly ready to buy a rental property.
- Look for possible properties. Search out affordable properties in stable neighborhoods.
- Check into financing. See what interest rates you would qualify for and what types of mortgages are available to you.
- Consider your willingness. Ask yourself if you’re willing to be a landlord. If you don’t want to be hands-on, consider how hiring someone for the job will impact your financial calculations.
- Plan for the future. Look beyond buying a rental property. Are you financially ready to deal with any planned or unplanned expenses that come with owning a rental home?
PrimeLending Kansas City offers personal attention, local expertise, and straightforward guidance. Whether you’re weighing the pros and cons of owning rental property or eager to buy a home to call your own, we’re ready to help you figure out the financing. Contact us today to get started.
*PrimeLending is not authorized to give tax advice. Please consult your tax adviser for tax advice for your specific situation.