Hi, this is Tanya with Envy Property Management. “Is owning a rental property really a good way to make money?” is a question we frequently get here at Envy PM. While making money off of a rental property may seem pretty easy at first, there’s a lot of due diligence to be done before making this decision. Many people may think all you do is purchase a property, rent it out, then sit back, relax, and earn back all your money and then some. So why wouldn’t you do this over and over again? While it’s true that rental properties can be a good source of income, they also carry a lot of risks and require a level of operational and financial know-how that a lot of people simply don’t have. So today I’m going to talk about the pros and cons of real estate investment, and if owning a rental property really is a good way to make money.
Pros of Owning a Rental Property
1. A steady source of income
Unlike the stock market, a piece of property is an actual tangible asset, one that can passively earn money through tenants’ rental payments. Something to keep in mind, however, this asset also depreciates, so upkeep will always be eating away at your earnings; it’s a delicate balance. You can’t simply purchase an investment property and never expect to spend money on maintenance. Deferred maintenance is a good way to wind up with unhappy tenants and thousands of dollars spent catching up on things that should’ve been taken care of long before they became an emergency. But a well-managed property can provide a steady dividend that’s not directly tied to the uncertainty of the stock market, and can be a good way to diversify your overall investment portfolio. It’s also worth noting that you’ll be investing in an insurable asset, meaning you will be somewhat protected if disaster strikes.
2. Easy to finance
You can buy a property with as little as 20% down, allowing you to leverage other people’s money to get started. Of course, you want to be smart about what type of investment to get involved in. Make sure you’ve done your research for the area the property is located in, is it desirable? Do rental properties do well in this area? Reach out to a local property management company and ask them these important questions. They'll be your first line of defense in choosing a rental property in a good location. But remember, if you aren’t careful, choosing the wrong property can lead to trouble quickly, but it’s a good way to scale up rapidly without putting in much money upfront.
3. Tax benefits
Many Americans think of owning property as a birthright, and the tax system certainly reflects this, given the number of deductions you can take for doing so. We always recommend you consult your tax professional but some possible tax deductions are:
- Repairs
- Insurance
- Management Fees
- Travel Expenses
- Utilities
- HOA Fees
- Depreciation
- Property Taxes
- Mortgage Interest
- Landscaping – Yard Care
- Advertising
- Legal
- Home Office
4. Inflation protection
As found in an article published by Forbes, one of the best ways to fight inflation is through buy-and-hold real estate properties. Forbes explains it this way…
“First, let’s evaluate how you actually lose to inflation through traditional investments. For many people, we evaluate what we will need to retire based on our current lifestyle. If we’re making $100,000 a year, we might begin investing and set up our accounts based on what we deem will be comfortable. However, if you began a retirement account in 1989 with a $100,000 salary in mind, in 2019, you would actually need $209,910.82 due to the cumulative inflation rate of 109% over the past 30 years. Beyond that, the fees charged to manage many retirement accounts completely eat up the funds required to keep up with the inflation rate. As inflation rises, so does the value of your property, along with the rent you collect from your tenants. Since inflation is almost always flat or rising, real estate can be a better option than fixed-income investments in the long run.”
Cons of Owning a Rental Property
1. Depreciation
We all wish we could just purchase an investment property and sit back, collect rent and never have to do any maintenance at all. This is far far from the reality of being a rental property owner. You would never consider purchasing a new vehicle but never expecting to have to get new tires or change the oil. With rental properties, you will be in a never-ending war against repairs and maintenance both big and small. Plus, it’s hard to plan for—even if you have the property fully inspected, there are almost always going to be unexpected costs in maintenance and repairs, even in new homes.
While you can save some money by doing the work yourself, it’s a huge, ongoing time commitment. At Envy Property Management we hold a general contractor's license and are properly licensed and insured to do all of our maintenance in-house. This saves our investment property owners time and money as opposed to hiring a professional contractor themselves.
2. Lack of liquidity
Unlike stocks, real estate is not a liquid asset. This means that if you’re desperate for cash, you’ll have to wait months, or maybe even years to sell your property, even if the market is in your favor.
3. Difficult tenants
The downside of being a landlord is that you’re relying on other people’s income for your own cash flow, and people are unpredictable. Don’t be too eager to fill the void by accepting an unqualified tenant in your home. Everything starts with finding the right tenants, and before letting anyone move into your property, you must thoroughly screen them. At Envy Property Management we have a thorough 20-point tenant screening process to ensure we’re getting the right tenants for our investment property owners. We have less than a 1% Eviction Rate and we have earned this achievement by applying our screening process.
Managing tenants is a stressful and all-consuming task, whether it means chasing down late or missing rent checks, settling disputes with other tenants, or dealing with unexpected vacancies. It will take a certain level of stamina to protect your asset, so you’ll have to get really comfortable with conflict if you want to be a successful landlord. Of course, hiring a property manager to take care of all this stuff for you will be your best course of action.
Know What Your Getting Into
The bottom line is...be smart about purchasing an investment property and know what you’re getting into. The most important thing to consider before you buy an investment property is to formulate a plan on how it will make money for you. No one wants to be the landlord that is upside down in their investment property every single month. Make a budget that includes fixed and variable costs, and an emergency reserve. Set aside money for taxes, maintenance, and legal fees. You’ll also have to be educated about real estate trends and choose a property with long-term upside, which isn’t always easy to predict. Envy Property Management is a great resource for keeping track of these trends.
In the end, it’s crucial to be smart when choosing to purchase a rental property to make money. For what is considered “passive income,” investment properties are a lot of work, and it can take years before they start paying off, so make sure you are fully aware of what you are getting into before you make your purchase.
Envy Property Management is a great resource when making this pivotal decision. We have years of experience in making money through investment properties. If you want help choosing a Northern Utah property management company to guide you through this process, please contact us at Envy Property Management. We are a wealth of information when it comes to professional property management of your investment. You can always ask us for valuable tips and extra resources to make the choice simple and painless. Give us a call today at, 801-337-4337, or visit our website at envypm.com where you can easily view our three-tiered pricing plan, so you can choose the package that best fits you and your needs.
