Real estate is one of the most profitable investments may investors make. It’s a great way to diversify your portfolio and offset the risks of the stock market. However, just because it can be a great investment doesn’t mean that it doesn’t have its downsides.
Before you buy an investment home, you should truly understand both sides of the equation. With enough research and the right professionals on your side, you could make your dream of investment real estate become reality. Below we discover both the good and bad things about owning a rental home to help you decide.
Advantages of Owning a Rental Home
First, let’s talk about the good stuff – the reasons you probably want to own a rental home.
- Cash flow – If you are lucky enough to rent your home out, you’ll earn cash flow. Hopefully, you can price the rent high enough that you cover the cost of the mortgage plus have enough money to put in your pocket. Since renters pay monthly, you have a continuous cash flow going as long as the home isn’t vacant.
- Real estate appreciates – Typically, real estate appreciates over time. As the housing crisis showed us, it can fall too, but a majority of the time, you’ll see an increase, especially if you stick it out for the long haul. Some areas have rapidly increasing values, while other values increase at a more moderate rate. Either way, you’ll earn equity in the home without putting any money into it.
- Diversify your portfolio – You can still make money on your rental home regardless of what the stock market does. The stock market can completely crash, but as long as your renters still pay you, income still comes in. Even if you don’t have renters, you can sell your home and potentially make a profit even if the stock market is down.
- No experience necessary – There isn’t a certain number of skills or a certain number of years of experience you need to be a landlord. Everyone has to start somewhere, right? As long as you can get financing, you can become a landlord.
Disadvantages of Owning a Rental Home
Let’s not discount the downsides of owning a rental home. Remember, buying a home is a large investment. You need to be sure you can handle it, and that includes knowing the downsides.
- There’s no guarantee you’ll have renters – If you buy a home in an area where there’s not a lot of renters, you may have trouble keeping your home occupied. Without renters, you are responsible for the full cost of the mortgage, upkeep, taxes, and insurance. You must make sure you can comfortably afford those expenses irrespective of whether you have renters or not.
- Wear and tear are tough – Renters often don’t care about a rental property as much as their own home. Even if you collect a security deposit, expect excessive wear and tear on the home. You are responsible for the repairs and maintenance on the home, which can get costly if the renters completely tear the home up.
- It’s exhausting – While owning a rental home is considered passive income, it really does involve a lot of work. You are responsible for all aspects of the home day and night. For example, a burst pipe at 3 AM means you’re getting a phone call in the middle of the night and you need to come up with ways to fix it quickly.
- It costs more than just a mortgage – You may incur many other charges owning a rental home than if you occupied it yourself. You may pay lawyers, financial advisors, and even rental service companies if you find that you can’t manage the property on your own.
Owning a rental home can be a great way to earn income and diversify your portfolio. The key is to make sure that you are financially stable in the event that you can’t keep the home occupied. Having an emergency fund that can cover the mortgage, taxes, insurance, and other fees is crucial as is having enough money to repair the home should it need repairs.