Advantages and Disadvantages of Owning a Rental Property
The advantages to owning a rental property are relatively few, but they’re powerful. To put it simply, if everything lines up well, you can make a lot of money from a rental property.
Income from Renters
The biggest benefit of owning a rental property is that the renters will provide you with a direct income stream. Those monthly rent checks go straight into your business account, ideally more than offsetting any expenses for the month.
For example, if you own a house that you rent out for $1,000 per month, that house when fully occupied will put $12,000 per year back into your accounts.
It’s hard to argue with a direct income stream like that. It is worth nothing, though, that those kinds of figures are optimistic ones and you shouldn’t just dive in expecting those results. Still, even partial results can be very good. If you can keep the property rented for just 75% of the year, that’s still $9,000 a year in income, after all.
Income from Property Value Growth
In addition, since you own the property, you stand to gain from an increase in the property value over time due to changing demands in the area, even if the property doesn’t undergo any changes. You can get much help by presenting your property in better way using Real Estate Virtual Tours.
This is obviously going to be a variable thing, as it depends heavily on the area where your rental property stands. In some areas, the value may rise significantly over the course of a few years, while in other areas it may remain flat. Ideally, this value growth holds pace with inflation at a minimum. If you happen to be in an above average area, you might find that you can beat inflation; on the other hand, a really stagnant area may not even keep with inflation.
The other factor that you should consider is that your sweat equity is likely to add additional value to the property as you maintain and upgrade it. Doing things like repainting the home, adding new siding, refinishing the inside, doing some basic landscaping to the yard, and so on will add value to the home without significant financial cost.
Not only will this allow you to charge more for rent, it will also increase the value of the property itself should you choose to sell it in the future.
If you enjoy home improvement projects, this should be a major attraction for buying a rental property. You’ll have the opportunity to fix it up upon acquisition as well as in between tenants, which will return very nice dividends for you.
On the other hand, there are a number of disadvantages to owning a rental property. Individually, these disadvantages are relatively small, but they add up to a significant cost.
Concentration of Assets
One drawback to investing in a rental property is that for most people, owning a rental property is a serious concentration of their assets. It would take a significant portion of the average American’s net worth to fully own a rental property.
The problem with that concentration is that it’s not diversified at all. That investment is in a specific house on a specific block in a specific neighborhood in a specific city. If that neighborhood goes downhill, you lose a lot of money. If that block goes downhill, you lose a lot of money. If something unfortunate happens to that house that insurance can’t handle, you lose a lot of money.
Like it or not, by owning a rental property, you’re tying yourself to the local real estate market in a very tight way.