Are you considering investing in rental property? There are endless pros and cons of owning rental property, and it’s become increasingly popular as an investment strategy, particularly in recent years, as people seek havens from wall street investing. A little-known fact is that upwards of 70% of rental properties are owned by small investors like you and us here at 40PlusFinance.com.
Even though the market itself can be volatile with housing prices and the demand for rental property can go higher or lower, depending on what’s going on in the real estate market.
Residential rental properties come in every imaginable shape and size. There are many types of real estate investment opportunities, including single-family rental homes, townhouses, and mobile homes, small multifamily properties with 2 to 4 units, or even larger investments ranging in the hundreds of units.
That’s one of our favorite sides of real estate. There is a rental property available for every type of investor.
While here at 40PlusFinance.com, we are huge fans of owning rental property, it is only a suitable investment for some.
On the one hand, rental property can provide a steady income stream, build equity, and diversify your investment portfolio. On the other hand, it requires high upfront costs, ongoing maintenance, and the potential for difficult tenants. As with any investment, it’s essential to consider your financial goals and risk tolerance before diving in.
In this article, we’ll explore the pros and cons of owning rental property, including the financial benefits, potential drawbacks, and critical considerations for property management. Whether you are a seasoned or beginner investor, we hope to provide valuable insights to help you decide about rental property ownership.
- Rental property investments are popular, with 70% owned by small investors.
- Diverse real estate options: single-family homes, townhouses, mobile homes, and multifamily properties.
- Pros of rental property: steady income, inflation protection, leveraging, predictable returns, appreciation, tax advantages, and asset diversification.
- Cons of rental property: capital/credit investment, difficult tenants, landlord responsibilities, rising taxes/insurance premiums, maintenance, neighborhood changes, tax code changes, and lack of liquidity.
- Rental properties can be viable options for over 40 investors as long-term investment and passive income sources.
- Consider investment timeline, goals, and tax implications before investing in rental properties.
- Property management services can provide hands-off investing for busy or inexperienced investors.
Why Invest in Rental Properties?
There is more effort required to invest in real estate directly than to manage paper assets. An investor will need to have more money available to get started, and less money that can be quickly turned into cash.
Famously, Robert Kiyosaki, author of Rich Dad Poor Dad, counts owning rental properties of all kinds as a core part of his wealth building strategy. Starting with a small, single family home purchased completely with debt and then progressing to owning large, multi-family apartment complexes, he continually talks about rental properties and the benefits of owning them.
So let’s dig into some of the benefits and advantages of participating in this financial freedom strategy.
Most significant Pros of Owning Rental Properties
One of the important benefits of owning rental property is the ongoing income it can generate. As landlords, we can collect rent from tenants monthly, providing a steady income stream. This income can cover the mortgage, property taxes, maintenance costs, and other expenses associated with the property. With a well-managed property, we can enjoy monthly positive cash flow, which can help us achieve our financial goals.
Rental income is also a great way to protect against inflation. As the cost of living rises, it’s possible to increase the rent we can charge. This means that our income will keep pace with inflation, helping us maintain our living standards over time.
Leveraging Other People’s Money
Another advantage of owning investment property is the ability to leverage other people’s money. We can use the bank’s money to invest in the property by taking out a mortgage to purchase the property. This allows us to increase our return on investment by using other people’s money to make money for ourselves.
Rental property can also provide predictable returns. Unlike the stock market, which can be volatile and unpredictable, rental property can provide a steady and reliable return on investment. As long as we have tenants in the property, we can expect to receive rent each month, providing a predictable source of income.
Appreciation Of Property
Another benefit of property ownership is the potential to appreciate that property. Over time, the property may increase in value, providing us with a capital gain when we sell it. This can be a great way to build wealth over the long term.
There are also several unique and misunderstood tax advantages to owning rental property. We can deduct many expenses associated with the property, including mortgage interest, property taxes, repairs, and maintenance, and this can help us reduce our taxable income and keep more rental income in our pockets.
Diversification Of Assets
Owning rental property can also provide diversification of assets. Investing in real estate can diversify our portfolio and reduce our risk. This can be particularly beneficial for investors with much money tied up in the stock market or other traditional investments.
Hard Asset Advantages
Investment property is also a hard asset, which can provide several advantages. Unlike stocks, which can be intangible and difficult to value, rental property is a tangible asset we can see and touch. This can provide security and stability, particularly during economic uncertainty.
Multiple Ways To Earn Money
There are also multiple ways to earn money from a rental property. In addition to collecting rent, we can make money from late fees, pet fees, and other charges. We can also earn money by selling the property, refinancing the mortgage, or using a 1031 exchange to defer taxes on the property sale.
Outsource Debt To Others
By owning rental property, we can also outsource debt to others. With a mortgage on the property, we can use the rent we collect from tenants to pay down the debt. This can be a great way to build equity in the property over time without having to come up with the money ourselves.
Finally, a 1031 exchange can be a powerful tool for real estate investors. This allows us to defer taxes on the sale of an investment property by reinvesting the proceeds into another property. This can be a great way to build wealth over time while minimizing our tax liability.
Most significant Disadvantages of Owning Rental Property
Capital and Credit Investments
Owning rental property can be challenging due to the substantial upfront investment of capital and credit required. Lenders typically ask for a down payment of 20-25% of the purchase price, and borrowers may encounter higher interest rates, often up to 0.75% more than for a primary residence. For some, entering the rental property market can pose a challenge.
Another disadvantage of owning rental property is the potential for difficult tenants. Even if you are careful when you are screening tenants, there is always a chance that you will end up with a tenant who causes problems. This can range from late rent payments to property damage to legal disputes. Dealing with difficult tenants can be stressful, time-consuming, and can even lead to financial losses.
Being a landlord entails responsibilities such as property maintenance, tenant acquisition, landlord insurance, and managing risks related to vacancy and economic downturns, which require more effort and attention than a conventional financial investment. The role requires addressing tenant complaints and handling maintenance issues, which can consume time and incur expenses.
Rising Property Taxes & Insurance Premiums
Another disadvantage of owning rental property is the rising property taxes and insurance premiums. As the value of your property increases, so will your property taxes. This can eat into your profits and make it more challenging to make a profit. Additionally, insurance premiums can increase over time, especially if you have had claims in the past.
Owning rental property also requires constant maintenance. You must keep the property in good condition and address any issues, such as plumbing or electrical problems. This can be time-consuming and expensive, especially if you have multiple properties to maintain.
The neighborhood in which your rental property is located can also impact your investment. If the community experiences a decline in appeal or becomes less desirable, attracting and retaining tenants can be more challenging, leading to extended vacancies and financial losses.
Tax Code Changes
The tax code can also impact your investment in rental property. Changes in tax laws can affect your deductions and credits, which can impact your bottom line. It’s essential to stay up-to-date on tax code changes and consult a tax professional to ensure you are making the most of your investment.
Lack of Liquidity
Rental property is not liquid, meaning it cannot be quickly sold or converted to cash. This can make it extremely difficult to access funds in an emergency or if you need to sell soon. Having a solid financial plan and preparing for unexpected expenses is essential.
Real Estate Market Cycles
The real estate market is cyclical and can be unpredictable. Changes in the market can impact your investment in rental property, including property values, rental rates, and occupancy rates. It’s essential to know market trends and have a long-term investment strategy.
Profit Isn’t Guaranteed
Lastly, it’s important to remember that owning rental property does not guarantee a profit. Many factors can impact your investment, including tenant turnover, property damage, and market trends. Having a solid financial plan and preparing for unexpected expenses is essential.
When a rental property is vacant, the landlord is on the “hook” for paying the mortgage, taxes, and utilities. This can be a significant financial burden, especially if the property is vacant for a longer time. It’s essential to have a plan in place for attracting and retaining tenants.
Rental Properties for the Over-40 Investor
As we reach our 40s and beyond, we think more about our financial future and retirement. One option to consider is investing in rental properties. While it may seem daunting, rental properties can be a viable option for over 40 investors. This section will explore why rental properties are a good investment option, how to consider your investment timeline and goals, and the role of property management services for hands-off investing.
Why Rental Properties are a Viable Option for Over-40 Investors
Rental properties provide a steady stream of income that can supplement retirement savings. As real estate investors, we have the potential to earn passive income from rental properties. Additionally, rental properties can appreciate over time, providing a long-term investment opportunity.
Another benefit of rental properties is the ability to use leverage. With a mortgage, we can purchase a rental property with a smaller down payment and finance the rest. This allows us to invest in a property we may not be able to afford outright while still earning rental income.
Considering Your Investment Timeline and Goals
Before becoming a property owner, it’s important to consider our investment timeline and goals. Rental properties are long-term investments and require a significant amount of upfront capital. As such, having a long-term investment horizon and a solid financial foundation is crucial before investing in rental properties.
Additionally, we should consider our investment goals. Are we looking for a steady stream of passive income? Or are we looking for a long-term investment opportunity that can appreciate over time? By understanding our investment goals, we can make informed decisions about which rental properties to invest in and how to manage them.
Also, in particular, we are very interested in the tax benefits of investing like this. Most do not realize the veritable tax bomb awaits them when they reach the age of cashing out their 401ks.
The Role of Property Management Services for Hands-Off Investing
Property management services can be valuable for those needing more time or desire to manage rental properties. These services can handle everything from finding tenants to collecting ongoing rent and handling maintenance and repairs. This allows us to invest in rental properties without the hassle of day-to-day management and outsourcing this task to professional a professional property management company.
When working with professional property managers, we must do our due diligence. We should conduct background checks on the company and its employees and ensure they have experience managing rental properties. Additionally, we should be aware of any fees associated with their services and ensure they align with our investment goals.
Upgrades to rental properties can also be a valuable investment. We can increase its value by upgrading the property and attracting higher-quality tenants, leading to higher rental income and a better return on investment. However, balancing the cost of upgrades with the potential return on investment is crucial.
Alternative Investment Options for the Over-40 Investor
As an over-40 investor, there may be better investment options than owning a rental property. If you’re looking for alternative investment options, here are a few:
Real Estate Investment Trusts (REITs)
REITs are specialized companies that own and operate real estate properties that are income-producing, allowing investors to participate in real estate without owning the property. REITs provide a steady income stream and have the potential for capital appreciation. They also offer liquidity, which means that investors can easily buy and sell shares of the REIT.
However, REITs can be volatile and subject to market fluctuations, and they may also be subject to capital gains taxes, affecting your returns. Additionally, the limited liability company structure of REITs means that investors have limited control over the management of the properties.
Crowdfunding Real Estate Platforms
Crowdfunding real estate platforms allow investors to pool their money for real estate projects. These platforms allow investors to invest in real estate with a relatively small amount of money and offer the potential for high returns and diversification.
However, crowdfunding real estate platforms are less liquid than REITs or other investment options. They may also be susceptible to capital gains taxes, and investors may not have control over the management of the properties.
When considering alternative investment options, weighing each option’s pros and cons is crucial. REITs and crowdfunding real estate platforms offer the potential for high returns, but they also come with risks. Index and exchange-traded funds (ETFs) offer diversification and low fees but may provide a different possibility for high returns than real estate investments.
Ultimately, the best investment option for you will depend on your own personal financial goals and risk tolerance. You may want to talk with a financial advisor to review the specifics of your own situation.
Analyzing the advantages and disadvantages of owning rental properties
Once you’ve reviewed the pros and cons of owning rental property, it’s clear that this investment strategy has both benefits and drawbacks. On the one hand, rental properties can provide a mostly regular source of passive income, tax benefits, and the potential for long-term property appreciation. On the other hand, risks include difficult tenants, upkeep costs, and lack of liquidity.
When figuring out whether or not to invest in rental property, it’s essential to consider your personal financial goals and risk tolerance. Are you willing to take on the responsibilities of being a landlord, or would you prefer a more hands-off approach to investing? How much down payment can you afford, and what are your financing options? These are all critical things to ask yourself before making a decision.
Making an informed decision about your investment strategy
If you decide to invest in rental property, it’s crucial to do your research and make an informed decision. This means understanding the local housing market, evaluating potential properties based on their location, value, and potential for appreciation, and considering the costs associated with property management, upkeep, and insurance premiums.
Knowing the tax code and taking advantage of any deductions or benefits available to homeowners is also essential. For example, mortgage interest and property taxes are tax-deductible, which can help offset the costs of owning rental property. Ultimately, owning a rental property can be a wise investment strategy for those willing to invest the time and effort required to be successful landlords. By meticulously considering the pros and cons and making an informed decision, you can maximize your returns and build long-term wealth through real estate investment.
Rental properties can offer high returns, low volatility (fluctuations), income that keeps up with inflation, tax breaks, and a way to become financially free.
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor, media buyer, faithful Red Sox Fan.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here, or get a hold of him on Facebook or Twitter.