Owning a rental home can be a lucrative adventure in your life. When it goes right, you stand to make a lot of money. Many people prefer this method of investing rather than gambling on the stock market. However, just like any other investments, there are good and bad sides to owning a rental property. We discuss each side below.
The Advantages of Owning a Rental Home
There are many advantages of owning a rental home. Many of them have to do with money, but some are even outside of the financial realm of things.
Pro: Steady Income
The most obvious is the income. You stand to make a good chunk of change by renting out a home you own. If you have a mortgage on the property, the tenant’s rent should cover that payment. This gives you the chance to invest in real estate without having to afford the mortgage payment yourself.
In addition to having help with the mortgage payment is the benefit of the equity you gain. With every mortgage payment you make (with your tenant’s money), you gain more equity in the home. This is all your equity – the tenant does not have a financial stake in the property. This helps increase the profit of your investment.
Pro: Tax Deductions
Currently, there are several tax deductions real estate investors can take including the mortgage interest deduction. This of course may change through the course of the years. Paying attention to the latest tax laws can help you determine if you benefit from this.
Pro: Income Without Work
Most of the time, owning rental homes leaves you with plenty of time on your hands. Whether you rent out many homes or just one, you don’t have to be at the property non-stop. Yes, you may have to make stops there to make repairs or do regular maintenance, but it won’t take nearly as much time as a 40-hour a week full-time job would.
Pro: Homes are Always Needed
As a real estate investor, you provide a product people need – a home. No matter what happens in the economy, people will still need a place to live. At no point in history did every single adult own a home. There is always a multitude of renters out there, helping your chances at investment real estate succeed.
The Disadvantages of Owning a Rental Home
Of course, with the good always comes the bad. It’s important to consider both sides so you can make the decision that is right for you.
Con: No Diversification
When you invest money, you probably hear that you must ‘diversify.’ This helps reduce the risk of losing it ‘all.’ When you invest in real estate, though, you are not diversifying. Even if you have multiple properties, you could still lose everything if you happen to have more than one ‘bad renter.’
Con: Risky Tenants
No matter how many background checks or credit checks you do on a person, it’s impossible to tell the type of renter they will be. You may find that even what seemed like the perfect candidate turns into a complete nightmare. Whether you end up with a tenant that doesn’t pay his rent on time or one that flat out stops paying altogether, it’s a risk you take.
Con: Damage to the House
Think about how you treat something that isn’t yours compared to something you own. Do you tend to act a little more carefully when your own money is invested? This is the case for many renters. While they may not be intentionally hard on the home, they might not take as good of care of the home as they would if it’s their own. This could cost you more money in the end as more frequent maintenance and repairs may be necessary.
Con: A Harder Sell
If you get to the point that you want to sell the rental property, but still have tenants, it could be harder to sell. Even if renters are not currently in the home, the fact that it was a rental could turn potential buyers off. Many people know the wear and tear that rentals take, which could cause them to turn to another home or offer less for the home.
Owning rental homes can be a very lucrative investment. We recommend that you take your time and do it slow. Do your research on the area and the potential renters. When you find the right home and the right tenants, it could make you some decent money.