The Pros and Cons of Rental Real Estate

There has been a lot of talk lately about the benefits of rental real estate and how it can help you become financially independent by bringing in purely passive income month after month. However I have a few cousins who own a number of rental properties and ever so often I keep discussing with them about how things are panning out so I get deep insights into the pros and cons of rental income.

Pros:

1. Low Real Estate Prices

Ever since the housing bubble burst, prices of all kinds of properties have fallen to extremely affordable levels and the mortgage rates as well are at historic levels. All this makes rental real estate a great choice as you might be able to grab great deals that can make you a ton of money in the future, both by capital appreciation as well as monthly rental income (provided you did your homework right and invested in the right property).

2. Passive Income At Its Best

There are only a few asset classes that can provide cash flow each month while requiring very little or no maintenance. And this is where rental properties are so effective. The only challenge is finding a reliable tenant and once you do that, the income will start flowing in, which you can then use in whatever way you like.

3. Capital Appreciation

As I mentioned before, it’s about the right time to purchase a rental property. The housing market is beginning to show some strength and prices are going to increase in the future. Although you can’t expect to double or triple your purchase value in the next few years, chances are you will get a good rate of return if you’re in it for the long haul, due to decent capital appreciation and monthly income from rents.

Cons:

Things might be looking all hunky-dory at this point, but there are a number of challenges associated with managing rental properties as well. Here they are:

1. Buying Ain’t Easy

Although mortgage rates are at historic loans, this doesn’t mean anyone can get a loan for a property just by putting some money as down-payment. It’s much harder now to qualify for loans than it used to be since banks want to make sure they don’t give a loan to someone who might end up defaulting. Apart from that, there are also other costs to consider, such as a substantial down payment, legal fees and any renovations/repairs that need to be made before renting it out.

2. Finding Tenants

This might seem to be an easy thing to do, but ask those who own a few rental properties and you’ll know finding a reliable tenant takes time & patience. Even when you seem to have found one, you would need to do a background check to ensure everything’s right. IF you don’t want to take the trouble, you can always hire an agency to do that for you, but you will lose out on a major chunk of the profits you would have made if you had dealt with everything directly.

3. Maintenance

A landlord is responsible for all the things that have to be taken care of in the rental property. This includes collecting the rent, fixing the leaks, repairing any broken windows and many other things that might irk potential/current tenants. All this takes a good amount of time, and if you don’t want to devote any time towards maintaining your property, then you should perhaps reconsider your decision of owning one.

Would you want to invest in rental real estate? What are your thoughts on it?

Comments

  1. I love real estate, but I’m not sure I’ll ever want to be a landlord. Renting out real estate can be passive income, but a lot of times it isn’t. It requires quite a bit of work in order to keep the place rented. I like the passive income that requires no or very little (less than real estate) work. That being said, I may get into buying properties in the future.
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