Investing in a rental property is a great first step into kick starting a successful real estate business.
But don’t quit your day job just yet, make sure you know what you are getting into and the advantages and disadvantages of renting out and managing real estate properties. Making passive income from your rental property is a good financial cushion to say the least, but in order to find financial stability, there are few key criteria to look for before jumping all in. Buying a rental property in a prime location is a prerequisite, you may need to pay a little bit more, but it is definitely worth it down the line. Not only will you be charging high rental income, but you will also gain an appreciating asset in the long term.
Moreover, choosing the right tenants for your rental property is crucial in order to maintain good relations, receive rent on time, and ensure the property stays in a good shape. It goes without saying that selecting the wrong tenants will have negative repercussions altogether, so always take your time and conduct due diligence when screening potential tenants.
Related: Real Estate Investing Tips: How to Finance a Rental Property
Advantages of Investing in a Rental Property
1. Steady income
A steady income is the main reason why people jump on the real estate bandwagon in the first place. You make passive income from renting out your property to tenants. Essentially, your tenants are paying off your mortgage payments every month, so make sure you maintain a good relationship to keep them renting your property in the long term.
Whether it is a traditional property or an Airbnb rental, buying a rental property gives you financial security, and most investors are smart enough to turn it into a long running business. As a landlord, your job is far from passive; you must be very much involved with the upkeep and management of the property and adhering to your tenants’ requests, complaints, and demands. Hiring a professional property manager is a good idea if you cannot keep up with the daily demands of the job.
The responsibilities of a professional property manager include but are not limited to:
- Collecting rent
- Finding tenants
- Screening tenants
- Handling complaints and emergencies
- Handling move outs
- Dealing with evictions
- Dealing with maintenance and repairs
- Filing taxes for the property
Long story short, landlords really get their money’s worth when hiring a professional property manager.
2. Appreciation
The second incentive of owning a rental property is appreciation. An appreciating asset increases in value over time under two conditions: it is located in a prime location, and market conditions are sunny side up. Buy and hold real estate investing is a long term strategy with an annual return on investment of 8-9% (on average). Buy and hold investors and/or landlords typically hold a house for 5-30 years. The idea is to keep renting out the property for as long as possible until you decide to sell it for a good profit.
Risks to watch out for in buy and hold real estate investing include:
- Occupancy risk: the risk of vacancy can become your out of pocket expenses.
- Property price depreciation: if the housing market is in a downturn, your property’s value will naturally drop significantly.
- Liability risk; i.e., liability for tenants and employees.
3. Tax advantages
Investing in a rental property is considered a business, and for investors, this means getting tax benefits in return. Real estate investors can deduct expenses from their rental income to reduce the taxes they owe.
The top 10 tax benefits for landlords include:
- Interest: i.e., mortgage interest payments used to improve the rental property
- Depreciation
- Repairs
- Travel if it applies to the business
- Employees and contractors
- Casualty and theft
- Insurance
- Legal fees
4. Real estate turns into a business
Establishing a successful career in real estate is a very rewarding business venture, and most real estate investors eventually quit their 9-5 job to dedicate their time to growing their real estate business.
Some tips to turn real estate investing into a successful business include:
- Take baby steps as a start: start small and do not quit your full time job just yet. Make real estate a part-time job until you can afford to quit your 9-5 job.
- Save money and improve your credit score before you buy your first rental property.
- Acquire the right knowledge (use the web to learn for free)
- Find an expert or a mentor.
- Hone in on a real estate strategy that is aligned with your long term goals and financial resources.
- Start today!
Related: What Can I Rent My House For? – Traditional and Airbnb Rentals
Disadvantages of Investing in a Rental Property
1. Tenant risk
The risk of having vacant units is a dreaded fear for most real estate investors because this means they are paying out of their own pockets and not earning monthly rental income. To avoid this issue altogether, make sure you run background checks and screen potential tenants properly to reduce the tenant risk.
Tips to mitigate tenant risk for landlords include:
- Take appropriate measures to screen prospective tenants, i.e., ask for three or more references.
- Handle evictions carefully and make everything legal, i.e., hire a real estate attorney.
- Stay on good terms with tenants.
- Keep the rental property in tip top shape to avoid tenant complaints.
- Set a competitive rental price to screen out the bad tenants.
2. Passive income means active work
Landlords do not have a passive job, and there is lots of work and upkeep they must perform in order to keep the business running and their tenants happy.
Landlord tips for success include:
- Set office hours for your business and tenant queries.
- Charge a late fee.
- Increase rent on your longer term tenants.
- Add revenue streams to maximize rental profit, i.e., offer extra house cleaning and landscaping services.
- Implement pet fees.
- Fix problems in the house right away, it’s always less expensive to correct a minor problem before it becomes a major issue.
- Do not buy homes in a run-down neighborhood to dissuade bad tenants.
Related: How Can You Use a Rental Property Calculator to Buy the Best Investment Properties?
3. Market risk
The housing market is ever changing and unpredictable, and as a result, real estate investors can never guarantee a return on investment. But, you can be proactive and selective in which areas to invest in and be able to foresee and anticipate market conditions and trends to make smart decisions.
Keeping up with current news and economic trends is very important; as long as you are informed about what is happening, you are at better odds to make smarter decisions regarding your business. It is worth mentioning that the housing market is a lot more stable than the stock market, and real estate investors can find ways to hedge against real estate risk without incurring major losses on their investments.
Conclusion
Investing your money in a rental property is a very rewarding business opportunity, and for most it becomes a full time business. You can become your own boss and kick start a successful real estate business to reap financial stability in the long term.
Head over to Mashvisor to find your next business opportunity!