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Pros and Cons of Owning and Managing a Rental Property

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Pros and Cons of Owning and Managing a Rental Property

Over 30 percent of Americans rent their homes. This amounts to approximately 44 million households! Clearly, there is a demand for rental properties out there – why not get in on the action?

If you’re thinking of becoming a landlord, make sure you’ve done your research about managing a rental property. There are many benefits to being a landlord, even besides the income! But owning rental properties takes work and responsibility.

In this article, we’ll dive into all the pros and cons of becoming a landlord. We’ll also give you a guide to success as a property owner: what to do, what not to do when to outsource labor, and what to prepare for.

If you’re ready to learn, keep reading. This article will teach you everything you need to know before buying a rental property.

Should You Become a Landlord?

Rental properties take a special kind of mindset to manage. You have to be good with people for the most part, but you also need a set of delegation skills. So how do you know that being a landlord is right for you?

Here are a few questions to ask yourself before deciding to buy property:

  • Am I ready for this responsibility? You are liable for all properties you own and have to be communicative to tenants; can you handle that responsibility?
  • Will I be willing to screen tenants? You may want to help out all applicants, but to protect your investment, you’ll have to screen tenants and make some hard choices
  • Can I make difficult decisions? Owning rental properties means that at some time, you may have to evict your tenants or pursue legal action in order to protect your investment
  • Do I have tough enough skin? In your ownership journey, you may run into some worst-case scenarios; can you handle it?
  • If the property is damaged, will I be able to help repair it? This isn’t asking whether or not you’re a master carpenter, but do you have a trusted repair or maintenance company on call?

We don’t mean to make it seem like being a landlord is all downsides! Like any other job, it has its pros and cons. But there’s a reason over 10 million Americans own rental properties!

The Pros of Being a Landlord

Being a landlord isn’t always easy, but it has a lot of benefits. Even outside of the fact that you’ll earn extra money, owning a rental property can change your whole lifestyle!

Here are the most significant advantages to becoming a landlord!

  • Passive income: renting out a property is a guaranteed revenue stream that doesn’t require regular, active labor
  • Tax benefits: there are many tax deductions and government programs you can utilize as a landlord
  • Allows you to keep a home: if you’ve inherited a home or property, you can keep it in the family and turn it into a revenue stream
  • There are always renters: like we said earlier, nearly a third of Americans rent their homes; you’ll always find a tenant
  • Low risk: property and homes are always a solid investment
  • Self-managing: especially if you utilize a property manager, you can put little regular effort into managing your rental
  • Anyone can do it: if you’re homebound, disabled, or a stay-at-home parent, owning property is one of the best ways to make passive income

In order to give a balanced vision of the landlord lifestyle, here are some of the downsides you may run into. It’s good money, and it’s fulfilling work, but it presents unique challenges as well.

The Cons of Being a Landlord

Landlords get a bad rap sometimes. But there are some genuine cons to owning and managing properties. Real estate is unpredictable, and there are some definite risks associated with renting.

  • It can be expensive: especially if you recently bought the property, it may be a year or two before you see a tidy profit; you may also have to sink lots of money into a fixer-upper home
  • Unreliable tenants: you have to rely on other people being responsible and paying their rent on time, and other people aren’t always predictable
  • Possible lawsuits: whether you have to evict a tenant or sue for damages, you may end up going to court more than once over a property
  • Property maintenance: as the landlord, you will be on the hook for initiating and financing maintenance
  • Mental stress: owning and managing a property can be anxiety-inducing!

We hope these cons don’t discourage you from investing in property! But you have to be adequately prepared for the experience. After all, 4 out of 5 landlords say that the money is worth the stress.

Types of Rental Properties

Now that you’ve gotten an overview of what it’s like to be a landlord let’s talk about your property options.

Property is generally divided into three categories: residential, commercial, and mixed-use properties. None of these is inherently better than the other! Each type of property requires a different kind of attention and care.

Remember that diversifying your portfolio is vital. If you’ve been managing a small residential property for a few years now with little hassle, consider branching out into commercial. This way, you’ll have multiple revenue streams at all times!

Now let’s dive into what makes managing these different types of properties so different.

Residential Properties

Residential properties are like the gateway into property ownership and management. These are homes, apartments, condos, and townhouses: any dwelling meant for full-time living.

With more people working from home than ever, residential properties are in high demand. If you can find a property in a part of a town in high demand, you can expect a good return on investment.

Residential properties are pretty stable; you can expect high turnover between tenants. People always need a place to live. If you invest smartly, you can buy a home that will never go a month without a tenant inside.

Commercial Properties

Commercial properties are storefronts, restaurant spaces, and office buildings. These are great for diversifying your investments and can bring in a lot of money.

Commercial properties experience a little less wear and tear than residential properties. There’s less that can go wrong! The process of claiming your commercial properties is different, though, so make sure you have a trusted accountant come tax season.

Some commercial properties require some amount of expertise. If you have a food service space, make sure you have professionals on call to repair the equipment inside as well.

Mixed-Use Properties

Mixed-use properties are a combination of residential and commercial spaces. These often come in the form of apartments over a restaurant or retail center. Mixed-use properties are also those with multiple purposes, such as an office building with multiple stores below.

Mixed-use properties usually require a more considerable investment, as you’ll be purchasing an entire building with multiple spaces. These properties take some work to maintain and manage but pay off beautifully! You may have to hire a team to help you manage the property, but the profits will still be high.

If you’re a seasoned landlord or feel confident in your management abilities, seek out some mixed-use spaces. Your portfolio will be nicely diversified.

Advantages of Managing a Rental Property

Managing a rental property will teach you a lot of valuable skills. It also pays off pretty quickly, even if you’re renting at affordable rates. Many people find a sense of purpose from managing rentals, and you can too.

Here are some of the ways that managing a property can increase your quality of life.

  • Leaves a legacy: owning a rental allows you to create a legacy that your loved ones can eventually take over, meaning you’ll be able to provide for them long after you’re gone
  • Guaranteed passive income: monthly rent will bring in a significant amount of income without you ever having to work for it; if you already own the property outright, your profits will be even higher
  • Property appreciates: real estate investments almost always appreciate in value as time goes on, so you’ll be able to sell for more than you paid
  • Property tax deductions: you can take advantage of tax deductions intended for property owners and rental managers

Even if you’re not looking to become a full-time landlord, renting out a property that you own is a brilliant idea. But it can be difficult.

Disadvantages of Managing a Rental Property

Even though managing a rental brings you passive income, it isn’t always easy. We mentioned earlier that many landlords mention feeling stressed out by their properties. The process of maintaining real estate has some disadvantages, especially at the beginning of your journey.

Here are the cons of managing rentals.

  • Different tax process: if you’re fuzzy on your tax details, you may have to hire somebody to help you declare everything you own; otherwise, the IRS might come knocking
  • Liability: as the owner, you take on all responsibility for your buildings; this means you are liable in the event of disaster or damage
  • Vacancies: nothing is more frustrating than trying to fill a stubborn vacancy; there’s no way to know how long you’ll go between tenants
  • May spend more than you make: older buildings and larger units present a lot of expensive problems; it may be years before you see a profit on some properties

When looking into buying a rental property, remember that it is still an investment. Just like investing in stocks, bonds, or businesses, there are risks associated. Housing is a stable market, but we all know it isn’t foolproof!

The Risks of Buying Rental Properties

You’ll be assuming quite a bit of risk when becoming a landlord. Make sure you’re up to all the challenges a rental property can present.

Here are some of the issues you may run into while managing a rental.

  • Finding tenants in time: you may fall into a long lull between tenants; going weeks or months without rental income can be discouraging, but there will always be more renters out there
  • Relying on tenants: you have to trust that your renters will be on-time with their rent every month, especially if you plan your budget around that income
  • Legal issues: you might get sued by a spiteful tenant, you may have to go to court to pursue an eviction, you may have to sue for damages; there are a lot of ways you can get dragged to court as a landlord
  • Structural damage: houses and buildings get damaged over time; you have to have money set aside for repairs at all times
  • Hiring managers and maintenance staff: you may not be able to do this all by yourself, and that’s fine, but it means you’ll have to go through the process of hiring qualified staff

Remember that you don’t have to do all of this yourself. If you’re planning on renting our multiple properties, your next step is to build a good staff. Many landlords contract out their labor; you don’t have to know how to do everything!

Property Management Options

Property ownership and property management are totally different tasks. Ownership is paperwork; management is a job. But here’s the thing: you can be an owner and not a manager.

Of course, you can manage your properties yourself. If you only have one or two units or are just beginning your journey as a landlord, being your own property manager is wise! This allows you to be on the ground and see the reality of maintaining a property and interfacing with tenants.

However, you can outsource that labor pretty easily. You can hire a property manager who acts as a go-between between you and the tenants. Find someone with experience managing properties and see what you can expect to pay!

There are also property management services you can contract. Working with a larger corporation has its benefits, and can speed up the hiring process.

Though you may be tempted to do it all yourself, delegating labor is an important skill. Being able to admit you need help is something to be proud of!

Property Maintenance

We’ve talked a lot about property maintenance and how much it can cost. But what do you actually have to do to maintain a property? What do you have to cover yourself, and what is the tenant’s responsibility?

In general, tenants will be responsible for day to day and aesthetic maintenance. This means you won’t have to play maid for your tenant! But you will be responsible for taking care of structural, electrical, and plumbing issues that arise.

This is why it’s important to have good relationships with local handymen and plumbers. You’re the one who will be calling and paying for their services! Find a trusted artisan who you know will do the job well.

You will also be in charge of updating the house as needed; replacing insulation, windows, etc. All normal wear and tear is your responsibility.

Keeping Your Properties Safe

The last thing you want is for your property to be damaged or broken. What security measures can you take to protect your property?

The first step is, of course, prevention. This means screening tenants before allowing them into the property: background checks, credit checks, and a general interview. Analyze potential tenants based on the risk they present to your investment.

It’s not a bad idea to install a security system into your properties. These protect you and the tenant from intruders and other potential threats and also justifies higher rent. People will pay more to know you’re keeping them safe!

If needed, you can even hire a security team to protect your property. This is common for commercial and mixed-use properties, as they’re vulnerable to break-ins and robberies. Even one security guard can prevent disaster!

That said, accidents do happen, even to the best landlords. That’s why it’s vital to update your insurance policies before renting.

Insuring Rental Properties

You may wonder if you really need insurance on your properties. It may be tempting to skip out on coverage, especially if you only rent a unit or two. However, in case of emergency, you’ll want to be sure that you’re covered.

That’s why when you purchase a rental property, you should also seek rental property insurance. Having insurance is the only way to make sure your investment is fully protected. Rental insurance helps you in the case of disasters, angry tenants, or other phenomena outside of your control.

If you’re planning to rent out a home you already own, you may wonder if your homeowner’s insurance is sufficient enough. It isn’t! You’ll need insurance that defines that property as a rental in order to protect you.

If you’re looking to insure a commercial rental property, you’ll need a different kind of insurance. Commercial property insurance protects a wider berth of possible issues and protects you legally in case of issue. Residential and commercial spaces have very different insurance needs!

Frequently Asked Questions

Here are the answers to questions you might have.

1. How Much Money Will I Need For Down-payment or Upfront Costs?

It depends. If you’re buying a smaller apartment or condo unit, you can likely get away with spending less than 100,000. For larger buildings and units, the price goes up depending on location, rooms, and more.

Seek out foreclosures nearby to save some money on a property. If you’re on a tight budget, shop smart around your town.

2. Should I Start With a Residential Property or Commercial Property?

That’s up to you! Many independent landlords begin with a residential space they inherit or already own. Residential spaces are seen as “easier,” but the truth is, they’re just more familiar.

If you want to start with a commercial property, choose an industry you’re familiar with. If you’ve worked as a chef all your life, buying a restaurant space is a sound investment!

3. Do I Have to Live Near My Rental Properties?

Not necessarily! If you’ve already found a property near your residence, that’s great. But don’t be afraid to branch out.

In the age of social distancing, it’s easier than ever to manage property and homes over the internet. Taking care of a far-flung property is no hassle.

4. What Are Average Rental Property Maintenance Costs?

There are a few ways to determine how much to allocate for your maintenance budget. Some experts say to save $1 per square foot each year for repairs and routine maintenance. Others say to budget half of the monthly rent.

This figure depends on the age and location of your property as well. Older homes are more expensive and require more attention.

5. Will I Need a Real Estate Lawyer?

At some point, probably. When managing rental properties, having a real estate lawyer on speed dial is always a good idea. Property laws can be tricky, and you’ll need an advisor.

A lawyer will also be necessary if you have to evict a tenant. Taking a tenant to court can be a headache – make sure you have a lawyer who knows your rights. Keeping an attorney on retainer is wise if you can afford it, especially if you have multiple properties.

Build a New Life by Becoming a Landlord

We hope this article has answered all of your questions about managing a rental property. Investing in a rental property is a great idea for passive income, but it takes a good bit of research first! Go into this exciting new chapter of your life prepared.

Once you’re looking for rental property insurance, check out LoPriore Insurance. We’re a local company that can meet your every insurance need. Whether you need to insure an apartment building or a retail space, we have a plan for you.

Reach out for a free quote today!

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