Investing in Rental Properties: Pros, Cons, and the Best Ways to Make Money from Them

So, you’re planning on investing in rental properties? Awesome! You’re about to hop on the best financial investment of your life!

But before you get caught up with all the hype, let’s get back to earth and be objective. Yes, real estate investing is a realistic way to earn great returns on investment and financial benefits, whether through rental income or tax advantages. However, it isn’t perfect, and it may not be for everybody. Still, if the pros outweigh the cons, which they do for the majority of the time, then there are some superior ways to make money that you will want to commit to.

The Pros of Investing in Rental Propeties

• Cash Flow

This is the most obvious pro of investing in rental properties. With positive cash flow, real estate investors are able to cover all necessary expenses related to the investment property and still have enough money to make a profit. Negative cash flow, on the other hand, is when a real estate investor spends more on expenses than he/she makes from the investment property. Breaking even on an income property is not beneficial either. Positive cash flow should be your main goal when investing in rental properties.

• Tax Benefits

The benefits of real estate investments come in many shapes and sizes, and tax benefits is one of the most popular profits. Tax benefits are really just tax deductions. With these tax deductions, filing your taxes becomes an exciting time instead of a dreaded one!

Tax deductions can be claimed on the expenses associated with the investment property. These include, but are not limited to, mortgage interest deductions, legal fees, and Airbnb fees (if renting through Airbnb).

Related: Top Ten Traditional and Airbnb Rental Property Tax Deductions

• Appreciation

The real estate market is very dynamic. Changes in time can lead to changes in a rental property. One such change, also a benefit of investing in rental properties, is real estate appreciation. Appreciation is the increase of the value of a property over time. Most real estate properties increase in value as time goes on. This increased value can help with a lucrative return if you decide to sell the rental property later on.

• Equity

Sticking to the concept of value, we land with equity. Equity is like appreciation, except it deals with value based on the financial status of the property. Roughly, equity is defined as the assets of a property deducted by its liabilities.

If you plan to sell a real estate property because of its appreciation, you also need to consider your property’s equity. If the equity is high, that means the investor owns most of the investment property, making the selling process smoother. Equity can also be used for the opposite purpose – purchases. Since equity is an asset, it can be used when making a purchase, like buying a car.

The Cons of Investing in Rental Properties

• Fees and Payments

Real estate investing is a profitable endeavor, it is also a costly one at times. As with most forms of financing, most real estate investors turn to a mortgage for help. Mortgage comes with its monthly mortgage payments, which can lead to negative cash flow if you are not earning enough in rental income.

Related: How to Deal with Negative Cash Flow Properties

Other aspects of real estate properties, like closing a deal, management, and legal issues, can result in fees. You will definitely need some cash reserves while investing in rental properties.

• Bad Tenants

You could have the best and most meticulous screening method imaginable and still end up with a bad tenant. This doesn’t happen much, if it all, but it is definitely something to be concerned about.

Bad tenants can mean all kinds of problems. These include unpaid rent, property damage, annoying the neighbors, and possible evictions. All in all, your rental income and success in real estate take a hit. Do not worry, there are ways to recover when dealing with bad tenants.

• Time

Another con of investing in rental properties is time allocation. There’s no doubt that any kind of investment requires time, even the most passive ones. However, if you are not able to manage your time wisely, you may end up using a great chunk of your time on your investment properties. This can hinder you, especially if the investment was meant to be passive and you also have a full-time job.

• Risk

Risk is for an investment like water is for a human; in normal doses, it is healthy, in excess it is not. Even if you have secure sources of income in rental properties, there is also some risk involved when investing in rental properties. No matter what, you are putting yourself out there. To analyze a property’s risk factor, you can always turn to Mashvisor, which can analyze that and a bunch of other important features of an income property.

Best Ways to Make Money through Investing in Rental Properties

• Residential Real Estate

Residential real estate is what it sounds like, it is renting a real estate property to tenants for them to reside in. This form of real estate is very broad. It can include everything from single family homes and condos to studio apartments and renting to college students. Residential real estate is one of the most common and most successful ways to follow when investing in rental properties.

• Commercial Real Estate

Commercial real estate is similar to residential real estate. The main differences are that you are renting to businesses instead of people and that it tends to be more profitable than residential real estate. One reason commercial real estate is very profitable is because businesses generate more income than individual or multiple tenants. There are many ways to invest in commercial real estate, and all of them are very effective.

Related: What Are the Best Ways to Make Money in Commercial Real Estate for Rent?

• Short-Term Rentals

Investing in rental properties for short-term purposes has become trendy over the years. And Airbnb has been one reason why. By investing in Airbnb and short-term rentals, you are in for high returns based on short lease durations. When located in suitable locations and performed correctly, short-term rentals can be one of the best ways to invest in real estate.

• Passive Investments

Real estate investing does not have to consume your entire time. You can still make high returns by investing passively. Great examples of this include REITs, turn-key properties, and real estate crowdfunding. Whatever passive investment technique you opt for, be ready for some great returns in little time!

Want to start investing in rental properties? Head over to Mashvisor for the best advice and the best property search for rental properties!