Buying a home or apartment to rent and make a profit might be enticing. However, the decision to invest in a rental property for income and long-term financial gain is not without its pros and cons. For instance, the housing market reacts rapidly to changes in supply and demand and the general economic climate. So, to be profitable, the rental property’s financial return must be greater than what might be earned in relatively secure assets like bonds and dividend-paying blue-chip firms. Additionally, not everyone is cut out to be a landlord when dealing with people. For this reason, we are here to discuss the pros and cons of investing in rental property.
Pros of Investing in Rental Property
It Generates Steady Cash Inflows
One of the most significant benefits of investing in rental property is that it can bring in monthly rent and is a great source of passive income. There are a variety of conveniences, such as washing machines, storage space, and parking spots, that you could levy an additional fee for using (depending on the type of real estate you purchase). If you can keep the costs of financing and maintaining the property to a minimum, the net cash inflows could be pretty substantial.
The Value of Real Estate Steadily Appreciates
Real estate values rise or fall depending on the degree of demand in the region. That may vary widely even over small distances, but the property can gain significant value over time with an intelligent investment. Also, if you can restore real estate, you may see a substantial boost in its worth. Thus, buying a rental property as an investment will allow you to reap significant financial gains when you eventually decide to sell.
You Can Buy It at Below-market Prices
If you have the cash on hand to satisfy the seller’s immediate need for a sale, you may be able to buy real estate at a discount. That is only possible if you have the cash on hand. Investing in real estate full-time is the best way to become intimately familiar with the local market pricing necessary to take advantage of price differences. Real estate agents in this field have a sharp eye for locating properties on the market at prices lower than the current market value.
Cons of Investing in Rental Property
Real Estate Requires Maintenance
Although all physical structures will eventually require changes or repairs, rental properties often need more frequent maintenance. Tenants constantly moving in and out causes a lot of wear and tear. For this reason, you must factor in expenditures for common repairs such as leaky faucets, cracks in a window pane, and rippling flooring. Additionally, unexpected costs due to extreme weather events like flooding or snow damage would be considered part and parcel of the rental business. Furthermore, landlords should budget for regular upkeep to maintain curb appeal, so prospective tenants are impressed when viewing the property. Just like any other investment, real estate investors should consider whether they have the resources to handle ongoing maintenance expenses when investing money into owning a rental property.
Betting on whether or not you will have tenants is a significant factor in determining the success or failure of rental property investment. If your tenants vacate and you cannot fill someone else to come, you may find yourself out of pocket and out of luck. Even if the apartment is vacant, you are still responsible for the mortgage, insurance, taxes, and necessary repairs. Your bank account will feel lighter and lighter as time goes on. Therefore, to lower this risk, it’s wise to find reliable tenants who will likely stay for the long haul and to set aside some money in case of vacancies.
It Has Poor Liquidity
The liquidity of paper assets like stocks, ETFs, mutual funds, and commodities funds is much higher than that of rental property. If you purchase a property, knowing when you can sell it is impossible. On the other hand, you can purchase stocks quickly with a single click using your brokerage account. Buying or selling real estate typically takes a few months. Finding the best buyer for your property requires time and work. If you want to sell a house, you should contact a real estate agent and have them help you advertise the home. However, even if you work with the best agent out here, it may take months or even years before you get a return.
How to Evaluate a Rental Property Investment
Evaluating a rental property investment requires thorough research and analysis of the local market and property values, calculating potential rental income and expenses, assessing the condition and potential for appreciation of the property, as well as evaluating any risks or challenges associated with ownership. Considering any additional costs of owning and maintaining the property is also essential. These include insurance, taxes, repairs, capital expenditures, and vacancy rates. By carefully examining these factors, investors can make an informed decision when considering a rental property investment.
As you can see, investing in rental property has both pros and cons. Steady cash flow, appreciation, and prices are just some of the many benefits investors may reap from purchasing rental properties. However, they wouldn’t provide such high returns if investing in them were simple for everyone. While considering whether or not to invest in your first rental property, evaluating your enthusiasm is essential. If it doesn’t interest you as a potential pastime or side business, you may look elsewhere for financial diversification. Few investments can compare to real estate if you want to get your feet wet, learn the ropes, and start raking in rent money.
Author Bio: John Ham has been in the real estate industry for over two decades. He has written for movingworldwide.com, focusing on creating articles and blogs to assist investors in determining how to invest their money in real estate.