With the way the economy is these days, it pays to have a few income streams to weather any downturn. People should be looking into ways to diversify their income in case one income stream disappears.
A classic way to earn extra income is to own a rental property. Collecting rent can happen in any economic circumstances and is an almost guaranteed income.
Sounds good, but it isn’t as easy as sitting around waiting for the checks to roll in. There are pros and cons to owning a rental property and probably isn’t a great idea for first time home buyers.
In this article, I will go over several of the advantages and disadvantages of owning a rental property so you can make an informed decision.
Advantages of owning a rental property
First, let’s take a look at some of the reasons you may want to buy a rental property, and then we’ll go through the disadvantages.
1. Take advantage of a down market
There are lots of people that love to buy old houses, fix them up and then flip them later. I’m sure you’ve seen those signs “We Buy Ugly Houses”. Well, that is a good business model, but if the economy stays in a recession for a long period of time, it can take a while to flip that house.
Instead, there will be people renting for a while as buying might be out of reach during a bad economy. When there is a recession, there are far more renters than buyers. You can ride out the down market and collect rent until it turns around and gives you a better return on your investment.
2. Increase property value
While you are waiting for the economy to turn around, your house is increasing in value. This can either be good for when you eventually want to sell it, or you can take advantage and grow your real estate empire.
Use the equity you’ve built in that first rental property to put a down payment on another. This will help you increase your rental income and even gain more value with multiple properties gaining equity.
3. Can be passive income
You could get very fortunate and have tenants that never call you in the middle of the night to come to fix a chronically clogged toilet. Or, maybe your unit is a condo, and the landscaping is done for you. In these cases, it can be a perfectly passive income. Yet, that doesn’t often happen.
To be truly passive, you can hire a property management company to take care of your house or apartment, so you can work your full-time job, or simply sit back and collect a passive payment. This is the advisable move if you plan to have multiple properties as it would be way too much work to do on your own. Pick a reputable property management company, and your life is much easier.
Disadvantages of owning a rental property
Of course, there is no shortage of cons to owning a rental property and it isn’t for everybody. Which of these scenarios will pertain to you, however, is unknown but be prepared to encounter at least one of these issues. Take these things into account before you get into the rental property arena.
1. Can be expensive
There are far more expenses involved with a rental property than a home you live in yourself. You’ll definitely be paying plenty of legal fees, especially if you have bad tenants. There is a ton of paperwork that needs to be filed and they usually all involve fees that must be paid. And, if you have trouble finding renters, you will be paying taxes and a mortgage on the property with no income.
None of this to mention the cost of repairs from wear and tear and the possibility of bad tenants that ruin your property.
2. It can be hard to sell later
Eventually, you may want to sell the property. Either because you were waiting for the real estate market to pick back up before selling, or you simply don’t like being a landlord. Either way, it may end up proving tough to sell it later. And then you’re stuck with a property you no longer want.
Rental properties are not always attractive to prospective buyers if they don’t plan to rent them out. There is a stigma that there is going to be damage caused by the tenants that will have to be fixed or that there will be difficulty getting rid of tenants that are already there when they are ready to buy. These might not be actual issues, but buyers perceive it to be this way.
3. It is too much work
Most landlords don’t want to pay for a property manager as it can end up being tough to make any money after all the other expenses. Which means you are the one that gets called to make repairs.
Even if you are handy and can handle doing some plumbing and carpentry repairs, it can be a burden. Especially if you are also working full time and have a family. This can end up being like another full-time job so you have to be prepared for the work.
Now, it may not be much work at all if you have the right tenants and the house is in good condition, to begin with. There may be the odd repair here or there, but the problem is that you don’t know how much work it will be until after.
Some people are made to be landlords, while others are probably better off flipping houses instead of renting. Property is almost always a good investment if you are patient and don’t mind a few headaches along the way.
As the economy changes, there will likely be far more people buying than there will be renting, so now is a good time to be thinking of becoming a landlord. If after reading the cons you still feel like it’s worth it, then good luck and make lots of money!
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