Know the pros and cons of owning a rental property
The main goal of people purchasing rental property is to have cash flow and build wealth over the long term. Diversification of asset risk is another factor to purchasing investment real estate. Investors use rental property as a strategy for diversifying their portfolios.
Another purpose to owning rental homes is to have complete control over their investment. As a landlord you are free to choose the best tenants. You are in control to use the property as a short-term or long-term rental, and decide when and if the time is right to sell.
Here are 3 pros and 4 cons of real estate investment.
Pros of owning real estate properties for rental investment
We are optimists so we will start with the pros to rental property ownership.
Rental income
The potential for recurring rental income, monthly income is very attractive to owning rentals. Some people call this passive income. But I think they have never owned a rental property. Rental income can be great cash flow investment returns but it is far from passive income. Owning more than one apartment in a quality Sacramento neighborhood and leasing them out to quality families is how to generate income and good cash flow.
Achieving positive cash flow from rents collected is the goal. The rent payments need to cover all the costs of owning and operating the property before it is positive cash flow.
Property appreciation
Property appreciation refers to the increase in the value of a property over time. The appreciation is measured from the purchase price to the current market value of the property. Appreciation is not realized until the property is sold. Some of the factors that can affect appreciation rates include location, condition, amenities, supply and demand. The inflation, interest rates, and the state of the economy are important issues when putting the rental on the local real estate market. If the local market is a seller’s market you will get a good price for the house sale. But if it is a buyer’s market, much of the theoretical appreciation will be lost due to current market conditions.
Tax benefits
The tax code in the United States is friendly to real estate investors. Here are some tax benefits for owning a rental property.
- Operating expenses are a deduction from gross rental income.
- When you improve the property it is a capital improvement added to property cost basis and recovered through depreciation.
- Depreciation expense is used to reduce the pre-tax net income of the landlords.
- Owners can take deductions for things such as traveling to the rental property and tuition for continuing education.
- There is a 20% pass-through tax deduction for qualified real estate investors.
Always check with your CPA or qualified tax account what deductions and depreciations you can use with your investment property. Googling for tax advice takes a back seat when dealing with the IRS. Get a professional accounting relationship when investing in real estate. Bonus note: ask the accountant first before you act. It will save many headaches.
Cons of owning real estate properties for rental investment
We are realistic also so here are the cons to rental property ownership.
The capital and credit required
The capital for the down payment of investment properties can be very high. Many lenders making loans for a rental property require a down payment of at least 20% to 30% of the purchase price. Mortgage loans on investment houses have borrowers paying a higher interest rate than they would with a primary residence mortgage. The higher interest rate is surprising to many first time property investors. The investor needs a good debt to income ratio, credit report, a rainy day fund, and a large down payment to qualify for an investment bank loan. Some real estate do an all cash deal to buy rental properties. Some investors use joint ventures or partnerships to creatively secure financing for the property.
The Tenants
The tenants is by far the big dread for many rental landlords. Bad tenants are time-consuming, headache-causing, stress-inducing, property damaging renters. Good renters with long leases will care and respect the home. They will also be on time with monthly rent payments. So one way to look at this issue is the rental payments are a pro and the tenants making the payments can be a pro or con. Bad tenants will keep landlords up at night and destroy the profitability of the real estate investment.
Maintenance and unexpected bills
Rental properties require steady maintenance and repairs to keep the home habitable. There are laws that regulate the conditions landlords must maintain the rental housing. The only way to keep the real estate value is to maintain the property. It is prudent for landlords to keep several thousand dollars earmarked for repairs and unexpected bills. Houses need routine maintenance, so remember to add them to the monthly expenses of the property. Newer homes need less maintenance than older homes.
Dealing with rent collection and evictions
A good property manager company will take these issues on for a fee. The property management company can create a leasing agreement. The lease is not just a legal issue but it can solve problems before they become problems. The collecting of rent can be a vexing task. Dealing with problem tenants can cost the landlord not only money but much stress. Knowing all the laws and ways to hand evictions is best left to the experts in my opinion. Maybe that is because I do my rental investing in California. California is a renter friendly state. Sacramento is always creating new laws that impact landlords and renters.
Other issues rental owner should know
Sacramento homes for rent as well as condos, townhouses and apartments make for a great investment when done correctly. We stand for diversity, inclusion and families everywhere. Is there a faith based owner vision with the investment? Discover the fair way to lease homes to qualified lessees. Make sure all your policies are known by the tenant up front. Pet policies, which bills are the tenant’s responsibility, and the date that rent is due, will help protect you from many problems as a landlord.
These pros and cons of owning a rental property are only the beginning of the process to real estate investing. Coffee Real Estate can help with finding you a property in Sacramento County and Placer County which to invest in Northern California. We can find you a value add property or rental ready home. We can help you search for multi-family properties or apartments. We also buy rental properties. Coffee Real Estate can find you a buyer for your investment property that will work with a 1031 exchange sale.
