Rental Properties: Pros and Cons (2024)

FAQs

What are the pros and cons of owning rental properties? ›

People invest in rental property for a number of reasons, such as to diversify an investment portfolio, generate rental income, and have more direct control over their investments. Potential drawbacks to owning a rental property include lack of liquidity, dealing with tenants, and deteriorating neighborhoods.

The drawbacks of having rental properties include a lack of liquidity, the cost of upkeep, and the potential for difficult tenants and for the neighborhood's appeal to decline.

#1: Vacancy Rates

The biggest and most common risk that real estate investors need to consider is high vacancy rates! Tenants will be the primary income source for all your rental properties. So, if you want them to make money, you need to keep your property occupied!

Main tax benefits of owning rental property include deducting operating and owner expenses, depreciation, capital gains tax deferral, and avoiding FICA tax. In most cases, income from a rental property is treated as ordinary income and taxed based on an investor's federal income tax bracket.

One of the major benefits of renting versus owning is that renters don't have to pay property taxes. Real estate taxes can be a hefty burden for homeowners and vary by county. In some areas, the costs associated with property taxes can amount to thousands of dollars each year.

Protection Against Inflation

Owning a rental property is a safe investment and an even better asset that can make money during periods of high inflation. It gains value when inflation is high and creates cash flow from renting during any economic period. It's really a win-win.

What are two pros and two cons of renting and home ownership? ›

Renting offers flexibility, predictable monthly expenses, and someone to handle repairs. Homeownership brings intangible benefits, such as a sense of stability and pride of ownership, along with the tangible ones of tax deductions and equity.

If you have your financial house in order, especially as interest rates climb, rental properties can be a good long-term investment, Meyer says. A rental property should generate income monthly, even if it's just a few dollars at first. Do the math to make sure the property you're considering is right for you.

A negative cash flow rental property is one that costs you more money than it earns each month. Having negative cash flow means that you will be paying for some of the monthly expenses with your personal income.

As a renter, you don't build equity over the long term and if you leave, you don't get to take any profits with you. Owning a home can be empowering and emotionally rewarding. The money you spend on your mortgage every month and improving your home yields a long-term investment benefit for you instead of a landlord.

Effectively managing and maximizing cash flow for your investment properties will allow you to live off the rental property income. Several factors can impact your ability to maintain a positive cash flow. You'll need to show your rental property in the best light possible to attract high-quality residents.

Ways the IRS can find out about rental income include routing tax audits, real estate paperwork and public records, and information from a whistleblower. Investors who don't report rental income may be subject to accuracy-related penalties, civil fraud penalties, and possible criminal charges.

2% Rule. The 2% rule is the same as the 1% rule – it just uses a different number. The 2% rule states that the monthly rent for an investment property should be equal to or no less than 2% of the purchase price. Here's an example of the 2% rule for a home with the purchase price of $150,000: $150,000 x 0.02 = $3,000.

Buying a house gives you ownership, privacy and home equity, but the expensive repairs, taxes, interest and insurance can really get you. Renting a home or apartment is lower maintenance and gives you more flexibility to move. But you may have to deal with rent increases, loud neighbors or a grumpy landlord.

How Do Rent-to-Owns Affect Your Credit? The only accounts that show up on your credit report—and, in turn, shape your credit score—are ones that are reported to the credit bureaus. Since rent-to-own agreements generally are not, they should have no impact on your credit.

What is the purpose of renting? ›

Reasons for renting

Financial inadequacy, such as renting a house when one is unable to purchase, i.e "renting by necessity". Reducing financial risk due to depreciation and transaction costs, especially for real estate which might be needed only for a short amount of time.

What are three costs of renting? Utilities, monthly rent, and renter's insurance.

Pros can include better affordability, less maintenance and plenty of amenities. Cons can include a smaller living space, more noise and reduced renovation potential. Lenders may shy away from certain postcodes where there's a significant oversupply of apartments.

Landlords usually consider little more than your monthly income and employment longevity. Renters' most significant expenses are rent, insurance, and utilities. Homeowners have housing expenses that are much higher and include items that should be considered.

You don't have homeowner stress.

Around 52% of renters in the study from the Joint Center for Housing Studies believe that renting is better because they don't have to deal with the stress that comes with owning a home.

Most landlords will require about one month's rent up front, which is usually refundable, as long as you pay your rent on time and in full and do not damage the property. Pet deposit or fee. If you have a pet, you may have to pay a pet deposit.

By convention, most U.S. residential rental property is depreciated at a rate of 3.636% each year for 27.5 years. Only the value of buildings can be depreciated; you cannot depreciate land.

The big goal of real estate investing is to increase your cash, otherwise known as building capital. When you sell a property that has risen in value, you'll boost your capital. The key, of course, is to invest in the right properties that will rise in value.

When it makes sense to sell a rental property? ›

Time your sale: To avoid being hit with short-term capital gains tax, it's commonly advised to hold on to a rental property for at least one year. In some cases, you'll want to wait until a lease has expired or allow time to complete renovations.

Selling your home might be the better option if you need the money to pay for your next home, have no interest in being a landlord or stand to make a large profit. Renting it out might be a better choice if your move is temporary, you want the rental income or you expect home values to go up in your area.

Despite what some may think, 2023 is still a good year to invest in real estate, thanks to advantages like long-term appreciation, steady rental income, and the opportunity to hedge against inflation. Mortgage rates are expected to decline, but the housing market is likely to remain competitive due to low supply.

Typically, mortgage lenders want you to put 20 percent down on a home purchase because it lowers their lending risk. It's also a rule that most programs charge mortgage insurance if you put less than 20 percent down (though some loans avoid this).

In the long run, owning a home is a good investment. When you rent, your money goes to your landlord, whereas when you put your money toward a home, you can see a return on your investment over time.

The 50% rule in real estate says that investors should expect a property's operating expenses to be roughly 50% of its gross income. This is useful for estimating potential cash flow from a rental property, but it's not always foolproof.

Real estate is a great asset to own when the economy is in freefall. A rental property typically acts as a natural hedge in a volatile market. People lose their jobs, earnings, and sometimes their homes when a great recession happens. During such periods, it can be reasonably simple to find tenants.

Rental real estate can be a good source of retirement income. The relative inefficiency of the real estate market can produce bargains that offer strong returns. If you need to borrow to buy a rental property, do so before you retire. Choosing a good location is more important than finding the cheapest property.

Following the 10% rule is another way to calculate the rate of average cash flow. Divide the yearly net cash flow by the amount of money that was invested in the property. If the result is over 10%. Then this is a sign of positive and a good amount of average cash flow".

Is rental income at risk? ›

At-risk refers to what you've invested in a particular activity. For rental activities, you're usually at risk for the: Adjusted basis of real properties. Certain amounts you've borrowed.

When your expenses from a rental property exceed your rental income, your property produces a net operating loss. This situation often occurs when you have a new mortgage, as mortgage interest is a deductible expense.

The biggest potential benefits of owning a rental property include a hedge against inflation, rental income, equity, and having control of the investment. Drawbacks to consider before buying a rental property include a large down payment, dealing with tenants, and lack of liquidity.

Rental properties generate recurring income meaning that can be relied on for years to come. It can be an excellent way to ensure financial security before you retire, or just have extra money in the bank. This is especially true if you plan to buy an apartment building as a rental investment.

Make no mistake; there are a TON of positives to owning rental property. However, don't jump into the rental property game without seeing that there are negatives and it can get very stressful. People often overlook things like times of vacancy, tenants who don't pay rent, and maintenance issues.

There are many costs of owning a rental property, including maintenance costs, mortgage payments, property management costs (if you choose to hire a company), insurance, etc. Being a landlord for the first time means that managing all of these expenses can be difficult, and even overwhelming.

The most common reason to become a landlord is to make money. By buying the right home (or apartment complex), you should be able to charge more for rent than your mortgage. This gives you some extra cash every month. That being said, you need to save some every month to help pay for any repairs that you need to do.

The amount will depend on your specific situation, but a good rule of thumb is to aim for at least 10% profit after all expenses and taxes. While 10% is a good target, you may be able to make more depending on the property and the rental market.

How Much Down Payment Do You Need to Buy Investment Property? Lenders typically have stricter guidelines when it comes to rental properties. Though you can buy a primary home with as little as 3% down, most borrowers need to put down 15% to 20% to buy a rental property.

Is it smarter to rent or own? ›

Buying a house gives you ownership, privacy and home equity, but the expensive repairs, taxes, interest and insurance can really get you. Renting a home or apartment is lower maintenance and gives you more flexibility to move. But you may have to deal with rent increases, loud neighbors or a grumpy landlord.

The overall cost of homeownership tends to be higher than renting even if your mortgage payment is lower than the rent. Here are some expenses you'll be spending money on as a homeowner that you generally do not have to pay as a renter: Property taxes. Trash pickup (some landlords require renters to pay this)

Renting a property is often referred to as throwing away money. That's because, unlike with a mortgage loan, renting doesn't help you build equity. Renting isn't necessarily the wrong move for everyone though.

Conclusion. Rental properties can generate income, but the return on investment doesn't typically happen right away. Rental property investments are also risky because of how many variables can affect its performance, like the housing market or your ability to keep it rented.