While purchasing a property to rent to others includes many of the same procedures as buying a home for your own, there are also a host of factors–both pro and con–that you should be aware of before considering this investment.
The most obvious advantage to being a landlord is that by collecting rent you gain a new income stream. Depending on the property and its location, you may command an excellent rental rate and a competitive field of potential renters. The amount of rental income you have left over after your mortgage payments and other expenses is additional money that your property produces for you every month.
Property also has the capacity to appreciate in value, and as a tangible asset–one that you can physically maintain or improve–you enjoy a little more control over its worth than you might over investments like stocks and bonds.
You’ll also gain some tax advantages by managing a rental property. For example, rental income could remain untaxed if, after expenses, it doesn’t achieve a net cash flow. Additionally, if you sell a rental property and then immediately re-invest in within another property, called “switching” the investment, the sale itself may be tax-free.
It’s important that a potential rental property owner remain aware and prepared for the hard work that comes with being a landlord, and consider that while they’re choosing the property itself. Landlords are liable for keeping their property up to government codes and handling basic upkeep, including plumbing, electrical, and structural issues. If you’re not a handy person yourself, you’ll need to be prepared to spend money hiring a superintendent and/or the occasional contractor. This could also include paying for a sudden unlucky expense, such as a tree falling over onto your roof.
Collecting rent is also a process that can be fraught with complications. Responsible landlords know to do thorough background checks and verify that tenants will be able to pay before the lease is signed. This doesn’t guarantee that your tenants will be dependable, however, or that they might not be headaches in other ways. On the other hand, leaving the property vacant doesn’t stop you from being responsible for its payments.
And although the property has the potential to appreciate, it also has the potential to lose value–so keep an eye on market trends, and don’t hold onto the property if you think you’ll end up losing money on the entire enterprise.