Real Estate Investing

Is Owning a Rental Property Worth it? The Pros and Cons

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Belong on Jul 19, 2021

Is owning a rental property worth it? Image shows a furnished lounge room in an article about owning rental property and if renting a house is worth it

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First, a note on vocabulary: at Belong, we hate the words “landlord” and "tenant." Instead, we call everyone in our residential network Homeowners and Residents. Because language matters, and we want your home to be loved, not just rented. That said, we use the terms “homeowner,” “landlord,” and “investor” interchangeably in this post to help more people find this useful information. To learn more about why we’re working to change how people think about renting, see this article in TechCrunch.

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Is owning a rental property worth it? There are plenty of benefits, but like any investment, it's not without risk either. This guide walks through some of the pros and cons of owning a rental property and becoming a landlord.



From a high-level perspective, the trends are favorable for those who own rental properties. Renting is seen as a smart lifestyle choice for many, with plenty of responsible, quality tenants looking for a place to call home. Choosing to investing their money in other areas outside of home ownership, there is a growing need for long-term rentals.


This creates unprecedented opportunities for homeowners who are in or thinking of entering the rental market. Rental income can help pay down a mortgage faster, postpone selling a home you’re not ready to part with, diversify your investment portfolio, and build wealth through real estate.


Still, leasing a home poses several risks that need to be weighed up. But with an informed approach and the right partner, you can mitigate or even eliminate these risks.



The Pros: 4 Benefits of Owning Rental Property



1. Passive Income


Passive income describes what sounds like it’s too good to be true: making money while you sleep. This is one of the biggest benefits of renting out a home, with many homeowners achieving positive cash flow, earning more from their property than it costs to run it.  


The ability to achieve a positive cash flow depends largely on two factors: what you paid for the house, and the strength of the rental market in your area. If you inherited a house from your parents, or if you are planning to rent out a house you bought 20 years ago, chances are you can achieve a positive cash flow.


If you recently bought a house and intend to rent it, you’ll need to look closely at math. “Passive income” is truly passive for some homeowners, requiring little to no day-to-day work. This depends on the number of properties you own, the size of your mortgage repayments, and whether or not you have an effective property manager in place that is making your life easier, without eating too heavily into your profit.  




2. Property appreciation 


When house prices are skyrocketing it can be tempting to cash-in and sell your house. However, once you've sold, you stop benefiting from any future appreciation. Renting our your home can be a great way to buy you time to watch the housing market and decide when it's the right time to sell.


Even if you can afford to leave your home vacant while you decide, renting to great tenants is a better option for the property. Having qualified tenants means that someone is regularly noticing things like leaks in the roof or pipes, performing regular cleaning and light upkeep, and also deters theft or vandalism. No matter your circumstances, it’s a smart choice to find renters who will love and secure your home.




3. Flexibility to return


When opportunity knocks, sometimes you need to leave a home you love. Renting to great tenants gives you the flexibility and time to decide what you want to do long-term. Perhaps you’ve had to quickly relocate for work, but can see yourself back in the neighborhood someday. Renting out your home presents a wonderful pause; plus you get the added benefit of providing a place for another family to make their own memories!




4. Tax benefits


The IRS allows for many of the expenses in home rentals as tax deductions, including mortgage interest, repairs, asset depreciation, even the cost of insurance. So when you run the numbers to determine the benefits that renting brings to you, make sure that you include these calculations.


Rental properties also open the possibility of a 1031 exchange, which can be a great tool to build wealth. While this might be eliminated with the new tax law, it’s worth looking at right now. This law allows an investment property to be sold without paying capital gains, as long as the money goes to buy another investment property. The qualifying phrase is “like-kind exchange”. One can potentially sell a rental home and buy land, an apartment complex, or other types of property under certain circumstances. It may not be used to buy a personal residence, however. 




The Cons: 4 Risks of Owning Rental Property


We’ve shared the good, now let’s move on to the less glamorous side of owning a property on the rental market.



1. Bad tenants


If “location, location, location” is the rule of buying real estate, then “tenant, tenant, tenant” is the rule of renting it. Good renters will love and care for your home, be respectful of your wishes, and be on time with monthly rent payments. Bad tenants are the time-consuming, headache-causing, stress-inducing, economically-damaging renters you don’t need.


There are simple safeguards that any landlord can take into account, like performing a background check, verifying income, and calling references (including past landlords). However, experience can not be overlooked. Consulting with someone experienced with safeguards in place can reduce the risk of selecting a renter for your home.




2. Unexpected costs


As all homeowners know, running a house can be expensive. Unfortunately not living there doesn't always remove these costs! Even with good tenants, water heaters can break, leaks start, termites gnaw. There are laws that regulate the conditions landlords must maintain for their renters, and be prepared to be held to them. Because life is full of surprises, prudent landlords keep several thousand dollars earmarked for repairs.


You will also need to switch from a homeowner's insurance policy to one for landlords. These policies typically have higher premiums with the increased risk of housing tenants. We advise you to find a trustworthy broker and have them bid on different carriers to find the best rate. Also, ask your broker to provide you with different deductible levels. Higher deductibles mean relatively lower premiums, saving you money. If you go that route you will need to budget the self-funded deductible for any claim.




3. Concentration of assets


While real estate investing does diversify your portfolio, it also means that a large sum of money is being held in a single asset class. From an overall financial planning point-of-view, experts would advise that you be diversified across different asset classes, including fixed income, equities, and real estate.  


Related to the concentration risk is the fact that real estate is not a liquid asset. It takes time and a healthy seller’s market to turn a home into cash. If your finances take an unexpected turn, a home will not likely provide fast emergency relief. It’s also important to remember that even if you achieve liquidity, there will be tax and fee implications that may offset any capital gain.



4. Dealing with rent collection and evictions


If you decide to self-manage your rental property, be prepared to deal with a lot of unpleasant tasks such as chasing tenants for rent. Hopefully you have secured solid, rent paying residents in your home. But in the worst-case scenario, there are no great solutions for collecting rent from a tenant. You’re bound to have an interaction that is awkward in the best case, and potentially hostile in the worst. Next thing you know you’re hiring collection agencies, researching lawyers, trying to find the best way out of a bad situation. 


A good property manager will take this off your plate, collecting rent and even handling evictions if it comes to that. But do your research - some property management companies charge additional fees for handling evictions and may also mark up any contractors doing repairs to your home while it's vacant.



Partner with Belong


Belong elevates property management to an entirely new level - which includes guaranteeing your rent (regardless of when tenants pay), handling maintenance and repairs without markup, and offering a dedicated concierge service 24/7 to both you and your tenants. Curious to know if your home might belong on Belong? Click here to see if it qualifies.