The Pros and Cons of Owning Rental Property

When considering adding a rental property to your portfolio, it’s essential to weigh the pros and cons. Owning rental property offers investors numerous advantages such as strong returns, low volatility, inflation-adjusted passive income, and tax benefits.

But it also brings its own set of difficulties. You could face lengthy vacancies, delinquent tenants, unexpected expenses and an economic recession.

Profitability

The success of owning a rental property is determined by several factors. Location, cash flow, and taxes all play an important role.

A successful investment property should have positive cash flow, or enough income from rental income to cover all operating costs. This metric is often used by investors when assessing how well a property will perform financially in the long run.

Calculating the cash flow of a rental property involves subtracting its operating expenses from annual rental income. This calculation is straightforward and often done monthly by investors.

Taxes

If you own a rental property, there may be several taxes to pay. These include property tax, depreciation and other related costs related to owning a rental property.

First and foremost, determine the taxable income associated with your rental property. This will include rent from tenants, advertising expenses and any other costs related to managing the property.

You should also take into account any deductions that can be taken from your taxable income. These could include mortgage interest, property taxes, maintenance costs, depreciation and other property-related costs.

Maintenance

Owning rental property can be a lucrative investment, but it also comes with its share of responsibilities – one being maintenance.

Fortunately, there are ways to keep maintenance costs low. By performing preventive maintenance like changing air filters, you can save money on repairs in the long run.

Planning ahead for major repairs can help you avoid unexpected crises. For instance, you could resurface the driveway or replace your HVAC system to avoid having to deal with unexpected expenses.

Maintaining a rental property can be tedious, but it’s essential for keeping it running efficiently for your tenants. In many states, maintaining such properties is even required by law – so make sure you understand your state’s regulations and what maintenance needs your rental should meet in order to guarantee both happy tenants and a secure property. This way, you can ensure both are taken care of correctly.

Tenant Risk

Owning rental property can be a lucrative investment, but there are also risks that come with it. These include vacancies, negative cash flow and inexperienced tenants.

Tenant risk is the main reason why some investors choose to hire a property manager instead of managing their own rental properties. A qualified manager will handle everything from rent collection and vendor coordination, all the way through compliance with landlord-tenant laws.

Property owners have several methods for mitigating tenant risk, such as screening prospective renters and collecting security deposits. Nonetheless, it’s essential to remember that certain risks cannot be avoided or controlled.

Unexpected Expenses

One of the most crucial aspects of owning a rental property is being prepared for unexpected expenses. Whether you require an emergency fund for a sudden roofing repair or you’re having difficulty paying rent after your tenant stops paying, having a reserve on hand is essential.

Unexpected expenses such as vacancy costs, maintenance and repair items, capital expenditures (CapEx), and property management fees can be especially challenging to predict, particularly when they don’t occur every month.

Operating expenses are ongoing and include property taxes; insurance; routine maintenance and repairs; as well as property management costs. According to the IRS, you may need to set aside 5 to 7 percent of gross rental income for capital expenditures.