There comes a point in many people’s financial lives where they have enough money to be able to buy another property to rent out. If you have some spare cash and you want to diversify your investments, buying a house or a condo to rent out can seem like a great idea. However, just as with most things in life, there are significant pros and cons that come with buying a rental property.
The benefits of owning rental property
There are several huge advantages that come with owning a rental property. If things line up well for you, having a rental property can bring in a lot of money for you and make your future a lot more financially secure. First of all, if you have a property that you rent out, you are guaranteed to receive a steady stream of money when your renters pay you rent every month. The only caveat here is that it will work out well for you only if the amount of rent you charge exceeds the cost of any repairs and improvements that you are doing on the home. Plus, you need to be able to keep the home occupied with renters as much as possible, ideally, with no breaks between renters.
Another advantage is that your home may increase in price with time. This can happen due to the growth of the average cost of homes in your town or because you’ve improved your home by painting it, replacing the siding, doing landscaping, etc. Improving your home in these ways can also allow you to charge more rent, which means you’ll be bringing in more money every month. This can be a huge advantage if you love DIY projects and home repairs.
The drawbacks of owning a rental home
While the advantages of owning a rental property are quite significant, the disadvantages can also add up quickly, sometimes causing you to actually lose money instead of getting a return on your investment. One of the main disadvantages of investing in a rental property is that it will probably take a significant amount of your net worth to own a rental home, which means that your assets will be more concentrated and less diversified. Lack of asset diversification always presents a huge problem – for instance, if the homes in the neighborhood where your rental property is located decrease in price or if an accident not covered by insurance happens in a home, you can lose a significant chunk of your assets.
Another risk of owning a rental property is that your tenants might cause significant damage to the home or might not pay rent in a timely manner, some even refuse to pay rent at all. Dealing with all of this will not only cost you money but can also cause stress and take up a lot of time.
Additionally, owning an additional home means that you’ll have to pay more in insurance, property taxes, homeowners association fees and other expenses. This can quickly add up to quite a significant sum and if you don’t have a tenant at your property for a few months, it can cause significant hardship for you.
Finally, a rental property is going to take up your time. You will be in charge of doing maintenance, repairs and improvements, collecting rent and looking for new tenants. All of this can take up a significant amount of time, so if your schedule is already packed, buying a rental property might not be the best choice.