Pros and Cons To Owning An Investment Property
For someone who is trying to build wealth, investing in a rental property can be an attractive option. There are many positives to investing in real estate that people should consider. Here are a few of the positives:
- The income from real estate is relatively passive income meaning besides collect rent, there isn't a lot the landlord has to do.
- Real estate is a relatively stable investment. As long as the property is purchased at a good price, the property will not normally depreciate in value barring the neighborhood going downhill.
- A person can use leverage to purchase real estate which makes a person with relatively little capital, be able to afford a more rental property. This also creates more risk but also creates a greater return on investment assuming the investment does well.
- People need a place to live. As long as the property is well kept and maintained, a land lord shouldn't have problems finding tenants that need a place to live.
- Investing in real estate provides tax advantages not found in other investments. When a person purchases real estate as an investment, they get to depreciate the real estate and deduct the depreciation expense against their income. This causes an investor's tax burden from real estate income to be less. Then once an investor sells the property, they can do a 1031 exchange in order to roll their taxable gain into the next investment property without having to pay depreciation recapture taxes or capital gains taxes on the gain.
These items above are the positives to investing in real estate but there are also some negatives associated with investment property.
- Tenants could trash your property and make it costly to maintain and prepare for future renters.
- Tenants could stop paying rent which would be costly. You would need to continue paying the mortgage while having tenants that don't pay rent. Depending on the state that you live in, eviction laws can make it a long process to get a tenant evicted.
- Real estate requires maintenance. Even if you have the best renters in the world, stuff still breaks. That is a given so it's important to have an emergency fund ready and waiting to important items that need to be fixed.
- The market in your area could deteriorate due to external forces outside of your control. You may buy your investment property in an area where they have a great demographics, great schools, and low crime among other things only to see your real estate market go downhill from there.
You may need to provide regular maintenance in order to keep the property looking good such as painting, or mowing the lawn. These are items that the tenant won’t take as much pride in as the landlord and so they may need to be done by you the landlord.
Here’s the bad news, there are more items that could go wrong that aren’t mentioned here. The possibilities are endless. But if you believe that real estate is a good investment(and it can be), and you believe you would enjoy managing your own real estate properties, then real estate may be the investment you’ve been looking for. One of the main pieces of advice about buying a rental property is to be sure to understand the numbers before you buy it. This will require you to be able to model your real estate investment into the future. If this isn’t your forte, then rely on an investment property calculator like the one from IQ Wealth Calculators. A wise real estate investor once told me that money is not made in real estate when you sell the rental property, but when you buy the rental property. Financial modeling and projections can help you determine if you are “making money when you buy.”
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