There are many benefits to being a landlord, but the truth is there are also drawbacks that you need to consider.
Benefits of being a landlord
One of the best benefits of owning investment properties is the rental income. If the rental income is higher than the property’s holding outlays, such as insurance, repairs, property taxes, etc., plus financing cost, the landlord gets a monthly payment, generating for you a stable source of income for as long as the property has a tenant and rent is being paid on time.
Another great benefit of being a landlord is the tax deductions. There are various tax cuts that investment properties are entitled to including:
- Business deductions (if the property is owned by a company)
- The cost of the property, including property insurance, property taxes, and certain maintenance costs or repairs
- Mortgage interest
A lot of these deductions are available only to rental property investors and can amount to large tax savings over time.
Equity and appreciation of the property
In most cases, real estate increases in value over time. Depending on its location, there is a chance the landlord can profit from the potential appreciation of the property on top of the additional income it generated from being leased.
Disadvantages of being a landlord
Income from a rental is considered to be passive, but a rental property is not a passive investment. So much work is required in owning a rental property. Landlord responsibilities include:
- Advertising vacancies and showing the property
- Screening renters
- Collecting deposits and executing leases
- Tenant communication
- Managing maintenance and repairs
- Collecting rent
- Filing evictions
One investment property may not entail a lot of work, but several properties will. Some landlords choose to hire a property management company to help them manage their rental property. Whether you manage your rental property yourself or hire a property manager, there is a fixed time obligation to investing in rental property.
Risk and liability of renting a property
There are certain risks and liability when a property is rented to a tenant. These include a lawsuit from a renter who is hurt in your property or inability to abide by your state’s tenant-landlord laws. On the other hand, a landlord could find themselves pursuing damages against a renter who damaged their property after they were evicted.
There are means to minimise risk, such as getting a sufficient liability policy for the property and putting the ownership of each property in a separate company, but the risk remains. Keep yourself updated on federal, state and local rental laws, and purchase adequate coverage to further protect yourself.
Maintenance and repairs
Properties must be maintained and cared for over time. It will suffer general wear and tear, or tenants caused damage to the property, items will have to be replaced, fixed or updated.
In some instances, unplanned expenses will come up. Some of these are:
- The roof needing to be replaced sooner than anticipated
- A pipe bursting, flooding the home
- The air conditioner or hot water service breaking
- Finding the home in disarray after a tenant has left
Allocate a part of your rental income for ongoing maintenance and repairs, and be always ready to work with renters, contractors and repair people to fix the problems.
Rental properties should be considered as long-term investments, as the gains are maximised the longer it is owned. Your money is tied up in a property for years to come. If your property comes with equity, you have the chance to leverage a part of that equity. However, the liquidity is far less in a rental property compared to alternative investments like real estate investment trusts (REITs).
All is well when a property is occupied, but when it is not, the landlord remains responsible for paying the property’s outlays and financing expenses. If the vacancy is longer than expected, it may be financially draining to continue the cost of owning the property.