At the last semi-annual family reunion, my nephew, Tim, approached me about his interest in building a real estate investment portfolio. I wasn’t surprised. In fact, I’d had a feeling he might eventually head in that direction. He’s obsessed with real estate and with being his own boss, much like I was at his age. And, as luck would have it, there was a small multi-family that had gone up for sale in his neighborhood. But, though he wanted to start investing, he wasn’t sure that holding rentals was the way to go. I told him there were definitely pros and cons of being a landlord, and that I’d been one myself for years. So, we broke away from the buffet for a few minutes and talked about rentals.
The Pros and Cons of Being a Landlord
Some investors buy a couple of rental properties as a way to create diversification in their real estate portfolios and sell off most investment properties while others invest strictly in multi-family or SFRs to rent out. It’s easy to want to follow in the footsteps of those who’ve done well. For new investors, like Tim, the buy-and-hold model can seem especially appealing if you’ve been thinking about investing for a while and happen to stumble across a multi-family for sale at a good price in your area. But, knowing how to make a good real estate investment means avoiding risky emotional decisions and facing the facts about what it takes to be a landlord. So that you can decide, like Tim did, whether to take it or leave it, let’s go over the pros and cons of investing in rentals.
- Cash flow. By owning rentals, you have the opportunity to make passive income from real estate investing. Once the mortgage and monthly operating expenses—such as utilities, maintenance, and property taxes—are paid, whatever cash is leftover is yours. Your tenants help to provide you with a regular stream of income.
- Appreciation. The real estate market tends to ebb and flow, but the tide, overall, is a strong one. So, because the value of real estate typically goes up in the long run, the value of your rental will likely increase too. The addition of a pool, security cameras, dog runs, or other amenities may help to speed up your property’s appreciation, especially if you’re able to raise rents and, as a result, your revenue.
- Tax breaks. There are several tax advantages to being a landlord. Not only can you take a deduction on the mortgage interest and fees that you pay, but you may be able to deduct other expenses as well. This includes property insurance, the cost of repairs, utilities not paid by the tenants, travel, some legal fees, and the property’s depreciation. These investment property tax deductions can leave more money in your pocket at the end of the tax year.
- Expenses. In addition to the initial renovation you perform on a property, you’ll be responsible for its ongoing maintenance and any repairs. Whether it’s monthly lawn care, a broken-down hot water heater, or a new roof, the burden is yours to bear. You’ll also have to handle any damage done by a tenant to their unit, especially if you hope to rent it out again. This could be pricey if their security deposit doesn’t cover it. And the cost of materials and labor increase over time just like everything else. Depending on the amount of upkeep a property requires, it could eat into your cash flow and your ability to sell for a profit later on.
- Increased liability. Even under ideal conditions, your liability increases as the owner of a rental. You’re responsible for ensuring the building is up to code and for knowing local tenancy laws. You may be held accountable when an injury to a tenant, worker, or visitor occurs on your property, as well as if you unknowingly break the law by working during off hours, for example. You never get a break from your landlord responsibilities, or your liabilities, even when you go on vacation.
- Tenants. There’s no way around dealing with tenants. When tenants are responsible, easy to manage, and pay on time, it can feel like a dream. When they wreck the property, disrupt their neighbors, or fall behind on rent—even for reasons outside of their control—it can seem like a nightmare. It’s costly and time-consuming to evict a tenant and to find good ones to fill vacancies. If you’re trying to manage an out-of-state rental, it’s even harder and, potentially, more expensive.
In contrast to investing in rentals, buying, renovating, and selling houses has the potential to offer more bang for your buck. The short time horizon for flipping houses—typically three to nine months—lets you take advantage of current market conditions, rather than risk your returns with an unknown market future. You can, then, use those returns to reinvest in other properties. Plus, you don’t have to deal with any of the hassles of being a landlord. Provided you have the right tools and a solid team at your disposal, and can get leads on distressed homeowners, flipping houses is a good business to be in.
Buy, Renovate, and Sell Houses with Less Hassle and More Reward
But, back when I was Tim’s age, I was one of those investors who thought it was safer to diversify my real estate portfolio. I bought, rehabbed, and sold a couple of homes, but I invested in some rentals too. Unfortunately, the passive income I got from the rental properties didn’t outweigh the hassle, or the expense, to keep them up-and-running. Then, the housing market crashed when I was trying to offload one of them. Having to sell at a price much lower than I expected put a serious dent in my finances.
Now that I only specialize in buying, renovating, and selling single-family residences, the headache of being a landlord is gone. And, by becoming an independently owned and operated HomeVestors® franchisee, so are any worries about finding leads. You’ve seen the “We Buy Ugly Houses®” ads, right? It’s hard not to with the HomeVestors®’ advertising campaign reaching 47 states and D.C. through TV, radio, and print. Well, distressed homeowners see those ads too. So, they know who to call when it’s time to sell and, when they do, those leads come to franchisees like me. It, then, becomes my job to help get them out of an “ugly situation” as much as it is to secure a good deal. And that is a whole lot more rewarding than being a landlord.
Take a more rewarding approach to real estate investing. Contact HomeVestors® to learn how to buy, renovate, and sell houses today.
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