Making money off a rental property seems simple at first—if you have enough money to buy a property and rent it out, why wouldn’t you? Although investment properties can be a good investment, they also come with a lot of risks and necessitate a degree of operational and financial expertise that many people lack. Here are some of the advantages and disadvantages of real estate investing, as well as common pitfalls to avoid if you plan to take the plunge.
A reliable source of revenue
The S&P 500 has averaged a 9.8% annual rate of return over the last two decades, and the real estate sector has done just as well by every standard. A piece of land, unlike securities, is a tangible asset that can gain money passively through rental payments from tenants. Of course, the asset depreciates over time, so upkeep will always eat into your profits; it’s a delicate balancing act. A well-managed land, on the other hand, can provide a consistent dividend that isn’t directly linked to stock market volatility and can help diversify your overall investment portfolio. It’s also worth remembering that you’ll be investing in an insurable commodity, which means you’ll be covered in the event of a catastrophe.
Defense against inflation
According to Forbes, purchasing and keeping real estate assets is one of the safest ways to tackle inflation. The value of your house, as well as your tenants’ rent, increases in tandem with inflation. Since inflation is almost always flat or rising, real estate can be a better long-term investment than fixed-income investments.
Many Americans consider land ownership to be a birthright, and the tax system reflects this with the numerous deductions available. Ordinary upgrades and depreciation costs are examples of these, which means you can exclude mortgage interest, insurance, and repairs from your return on investment.
Financing is easy.
You can purchase a home with as little as a 20% down payment, allowing you to borrow money from others to get started. Of course, if the investment is poorly handled, this can lead to problems, but it is a good way to scale up rapidly without investing a lot of money up front.
Depreciation is a term that refers to the process of
You’ll be fighting a never-ending struggle against small and major repairs. Although doing the work yourself can save you money, it is a massive, ongoing time commitment (hiring professionals is a better option, but that also comes with a cost). Plus, it’s difficult to budget for—even if the property has been thoroughly inspected, there will almost always be unforeseen costs, even in new homes.
Real estate, unlike securities, is not a liquid asset. Even if the market is in your favor, this means that if you’re desperate for cash, you’ll have to wait months, if not years, to sell your house.
Tenants that are difficult to treat
The disadvantage of being a landlord is that your cash flow is reliant on the profits of others, and people are unpredictable. Managing tenants can be a stressful and time-consuming process, whether it’s chasing down late or missed rent checks, resolving tenant disputes, or coping with unexpected vacancies. To protect your asset, you’ll need a certain amount of tenacity, so if you want to be a landlord, you’ll need to be comfortable with conflict. You can, of course, employ a property manager to handle this, but it can be expensive.