Learning Center

Find the answers to your home improvement questions.

Is a Rental Property a Good Investment?

If you own property and want to rent it to a tenant, it can be a profitable venture – as long as you know how to execute the process. A rental property investment can be lucrative, but there are some crucial things that every landlord should be aware of. Before you decide to rent out your property for extra money, weigh the pros and cons. With so many nuances and plenty of variables, is rental property really a good investment? Read on to find out more.

Rental Property Investment

The Pros and Cons Rental Property Investment

Owning a rental property can be a positive experience, but it’s very important to think about the pros and cons before you take the plunge. There are several positive aspects of renting out property that you own, but there are also a lot of pitfalls that you may encounter along the way.

Pros:

•   If you find a good tenant, rental property investment can bring consistent residual income every month. You can use this income to pay your mortgage or to make upgrades on your own home, pay down debts, or to save for the future.

•   When you rent your property, you’re building capital. This means that the tenant is helping you pay for the property you own, and then you can sell it later for a decent profit.

•   You can rent your property to help pay for renovations, then move back in later when your tenant moves out. It’s an easy way to build an income that can be turned around and invested back into your home.

•   Even if you only rent your home for part of the year, you should still make a profit which means that renting as a means of investment is a fairly reliable and lucrative venture.

•   If you purchased the property at a great price, you stand to make a lot of money, particularly with the current trend of rising rents.

Cons:

•   For tenants who don’t pay their rent, you’ll have to foot the bill for court costs, and you likely won’t recover much of the money you’ve lost.

•   As a property owner, you’re responsible for paying to fix anything that needs repair. This includes everything from a broken air conditioner to damaged flooring, leaky roofs, and more.

•   An unruly or difficult tenant can be tough to remove. You must follow your local laws and the proper procedures before you can evict them and start fresh with a new, better tenant which often takes a significant amount of time.

•   If you’re renting a property in a different state, it can be difficult to manage everything from afar. You should pay for a property management company to help, but they’ll take a portion of your rental income each month to cover their fees and costs.

•   Storms and other natural disasters or a house fire could leave you footing the bill for repairs while your tenant moves out and rents elsewhere. This is a major risk of owning any property, and it could mean that you’re left without rental income for months at a time.

Important Considerations

Rental property investment may help you rake in the cash, but there’s a lot of considerations to keep in mind. Finding the perfect tenant is often done through trial and error, which means you could end up with a few “duds” before you find the right one. Every time you rent to someone, you’ll need to draft a lease, set up payment options, and meet your new tenant. Depending on who you rent to, getting a great tenant can be a challenge for many landlords. Your property taxes will fluctuate, which means your monthly mortgage can change. If you have a tenant who has signed a year lease or longer, you can’t raise their rent to cover the extra cost.

As a landlord, you should always be prepared to expect the unexpected when it comes to expenses. Damaged walls, broken appliances, and all the other problems that come with owning property will be your responsibility. Make sure you have a “cushion” of money saved to cover repair costs. This will make it a lot less stressful when a tenant calls to tell you something has gone wrong. If you feel financially secure and you have a fair amount of money saved, renting for profit can still be a wise move. One way to prevent problems beforehand is to make sure the property is in excellent condition and that everything is in working order before you have someone sign a lease. Smaller homes are ideal since there’s a lot less that can go wrong.

Is Renting Your Home to a Tenant Right for You?

Once you’ve weighed all the pros and cons, you should sit down and crunch a few numbers to decide if renting your home is right for you. Calculate how long it will take before you start to see a return on your investment. If you own the property outright, every rental payment will be profit from here on out. However, if you currently have a mortgage on the home, you should calculate how much you owe and figure out how many years or months it will take before those rent checks start to put you in the black.

Overall, you want to be sure that having a rental property investment makes financial sense for you. Think about the various risks involved, and then decide if you’re ready and willing to take those risks on. Make sure that your rental property is located in an area with a decent job market and a low crime rate if possible. Those two factors will increase your odds of finding a reliable tenant you can trust. It’s also important that your rental property is clean and appealing to tenants. Take the time to renovate or clean up the home before you advertise it on the rental market. If you need guidance, a financial advisor may be able to help you decide if renting your property is a smart move for you.

Leave a Reply

Your email address will not be published. Required fields are marked *

You can use these HTML tags and attributes <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Notify me of followup comments via e-mail. You can also subscribe without commenting.