Rental properties can provide a way to supplement your income and over time can lead to your only source of income. However, as with any investment, there are some risks. Listed below are a few pros and cons to owning rental properties.
Fixer Upper
If you’re investing in real estate to make money. You can set goals to buy properties in need of tender loving care (TLC) with a sound structure. That is where going back to college will come in handy. Understanding the differences between civil engineering vs architecture will give you a leg up on other investment companies. Unlike other investors who may pass up on a property because of its looks, you can tell whether or not restoring it is worth the investment.
Buying Below Retail Value
You’re investing in real estate to turn a profit. Unfortunately, you can still buy in too high and even lose money if you don’t do your research ahead of a purchase. Buying any home at retail value and then investing thousands more to bring it up to code can be the right thing to do, but you have to know what you’re getting yourself into. It’s important to know the property values in areas you buy to make a well-informed decision.
Up and Coming Neighborhood
Unless you review the proposed legislation of each city and town ahead of buying a property, you won’t know whether the neighborhood property taxes will rise. Plans to add a park, a mall or put in a new bridge that provides access to a major highway are a few reasons they can increase.
Property taxes and insurance premiums can go up because of weather-related events. Being in a flood zone or prone to hurricanes or tornadoes are some common reasons. Make sure you know what zones the house is in so you have a full picture of those costs.
Overhead Costs
Before buying a rental property make sure to factor in every out-of-pocket cost. The mortgage, taxes and insurance are standard. You also need to pay for water, repairs and if you use a property management company to find tenants, a fee to them as well.
Vacancy
Unfortunately, you can have a beautiful, turn-key home that’s ready for tenants and it remains empty for several months. There are no guarantees that you’ll have tenants immediately. During that time, you will be responsible for paying the lender without any income to offset costs. For that reason, many real estate investors use management companies to advertise the property well in advance of listing it on the market.
Bank Foreclosure
Lenders don’t care that you’re off to a slow start. They want their money per the signed contract. If you suffer this setback, and a property does go into foreclosure, buying other properties in the future on credit will be more difficult. Make sure before you buy your first property that you have substantial savings. This will allow you to make your mortgage payment despite the absence of tenants or buyers.
Property Damage
If you want to rent, that’s good but there is something to keep in mind. Not all renters respect other people’s property. Sometimes, even when using a property management company to prescreen tenants, you end up with less than desirable occupants. They might pay late, miss payments, put holes in walls, and leave your property a disgusting mess. Unfortunately, there are laws in many states that protect squatters, and going after a tenant for damages costs valuable time and money. You can’t guarantee that you’ll find good tenants, but using a property management company will increase the odds of a favorable turnout.
Rental properties offer a way to supplement your income, put money away for retirement and can become a sole source of income. Weigh the pros and cons associated with renting properties carefully before purchasing your first home.
Whatever you choose to do, make sure you have a plan and do your research. It will save a lot of headaches later.
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