Owning a rental property has plenty of benefits but as with any kind of investment, there are disadvantages as well. And with any type of venture such as this, it is important that you know the pros and cons so that you can enter into it with having the most knowledge possible so that there are no major surprises along the way. Here is the truth about the advantages and disadvantages of rental properties.
The Advantages. First, the good news. There is plenty to celebrate about owning a rental property and here are a few of the advantages:
For obvious reasons, one of the major reasons for having rental properties is the income stream. While it is true that money has to go back out to maintain the properties, the income is sometimes quite lucrative and at the very least, is sometimes a steady way of making a profit and an extra income.
Sweat Equity is an increase in the value of the property due to the owners making it worth more through hard work; this is also known as ownership interest. Things that include fixing up the property like a new paint job or landscaping add value to the property which not only allows you to charge more for rent but increases the resale value.
Property Value Growth
This leads us to property value growth which is something that is variable but the potential is there for an increase, sometimes even without making improvements. This is because at times, the property may see an upswing in value simply due to its location or other factors that affect the rise and fall in value.
Disadvantages. There are always disadvantages to owning rental property and while these may not affect you, the possibility is there and you should be aware of potential drawbacks.
Concentration of Assets
Many people cannot afford to have most of their assets tied to rental properties. There are situations that really affect the bottom line such as losing value if the area your property is in loses value. Even if your rental is well-maintained, you could still lose money due to the rest of the neighborhood having low property values. Or, there may be a situation where you have some kind of disaster affect the premises such as fire or flooding and insurance won’t cover all of the losses.
A few of the necessary costs you have to deal with are insurance, taxes, and fees. The problem is that you can have an empty property with no rental income coming in and yet property insurance, taxes, and various fees still have to be paid. If you have someone in the property, that at least helps pay these costs but they do still cut into your profit.
Whether it is a tenant who won’t pay, a nightmare tenant, or in some cases – a lack of a tenant – you are exposed to the possibility of issues with your renters or lack thereof. Tenants sometimes cause damage, leave without paying, or have to be evicted, which is not only a time-consuming headache but there are costs involved.
Last but not least, you are responsible for the upkeep of your rental property. If you outsource or contract the work, you have to pay someone. If you do it yourself, you are using your own time and sweat in order to keep your rental property up to par.
If you have questions about rental properties and your taxes, please feel free to contact us by email or call us at 865-281-1461. We will be more than happy to talk to you and set your mind at ease.