Before you make any kind of financial investment, it’s incumbent on you to do your own due diligence. You need to have an understanding of all aspects and nuances regarding the investment you have under consideration.
Historically, investing in rental properties has consistently proven to be a solid investment option. Millions of astute investors have laid claim to the idea that real estate investment in America will always survive the test of time. According to a comprehensive study (The Rate of Return on Everything, 1870–2015) done in 2016, rental property investments consistently return the highest average returns with significantly less risk than other investments.
With all of this said, rental property investments are not foolproof. There are some risks related to recessions and natural disasters. To help you decide if a rental property is the right investment for you, here are a few pros and cons for your consideration.
The Pros of Investing in Rental Properties
There are several solid benefits to owning a rental property. The list of pros includes:
1. Tax Benefits – To encourage real estate investment, the IRS allows several really good tax deductions that can lower your taxable income. The most prominent deductions include:
- Property management fees
- Mortgage interest
- Maintenance and insurance expenses
- Depreciation
- Property improvements
2. Monthly Cash Flow – After the initial cash outlay for a down payment, you can begin receiving monthly cash flow in the form of rental income. In some instances, your rental income could exceed your monthly expenses, giving you a positive monthly cash flow.
3. Hedge Against Inflation – Some investments are adversely affected by inflation. With a rental property investment, inflation provides the basis for increasing rents. In a diversified investment portfolio, rental income increases can offset deficits from other investments.
4. Predictable Returns – The reason stocks and precious metals are riskier investments is because of unpredictability. With rental property investing, it’s much easier to predict returns by calculating rental income minus expenses.
5. Appreciation – While bringing in money in the form of rental income, the associated property will continue to appreciate. According to some real estate experts, real estate appreciates about 50% over any 10 year period with minimal risk.
The Cons of Investing in Rental Properties
No investment option is perfect. In the case of rental property investments, there are cons worthy of consideration. The list of cons includes:
1. Lack of Liquidity – If you purchase a rental property, you will likely be required to make a down payment of 10% to 20% of the purchase price. That’s the value of your total investment. Since it takes time and effort to sell a property, real estate is notorious for being a poor source of liquidity if you need to retrieve any of your investment.
2. Barriers to Market Entry – Before you purchase a rental property, you would need to do a lot of upfront work to determine the potential value of an investment. A lack of knowledge regarding real estate investing serves as a barrier to entry. Things you would need to know include:
- Finding the right locations
- Determining the appropriate amount of rental income to expect
- How to negotiate the best deals possible
- How to secure a rental property mortgage
- How to screen prospective tenants
- How to deal with contractors for maintenance and improvements
3. Dealing With Tenants – Dealing with the rental process and current tenants can create headaches. It’s just as likely you would land a dream tenant as it is that you would land a tenant who is always creating issues.
Conclusion: There is the upside and downside to investing in rental properties. It’s up to you to decide whether or not this would be the right investment option for you based on your current personal circumstances.
