Looking to be a landlord? Investing in real estate rentals can be lucrative, but be aware that “passive” income requires homework, real work, and some headaches. Whether you’re considering a long-term rental or an Airbnb, here’s a list of pros and cons homeowners face. But first, find out if real estate investing will work for you.
Homework
First step: legal considerations. Check your local ordinances to see if there are laws or regulations that prohibit short-term or long-term rentals. Also, check your existing homeowner’s mortgage contract to make sure there’s nothing that precludes a rental. If you want to refinance your mortgage, discuss this with your lender. Some lenders may reject short-term (Airbnb) income. Additionally, if a lender classifies your house as an investment property, there may be a higher interest rate.
Become knowledgeable about all the legal ramifications of being a landlord, including the tenant rights, the process of eviction and – in the event you choose to use a rental management company – all the safety and health requirements involved. State laws vary, but you’ll need to be aware of factors such as:
- Can a landlord enter the premises without permission?
- What responsibilities does the landlord have when it comes to repairs?
- What responsibilities does the tenant have when it comes to upkeep?
- What are valid reasons for eviction?
- How does the eviction process work?
- How can a tenant legally break a lease?
- Is there rent control that will impact how much a landlord can charge or how much the rent can increase?
- What are housing discrimination laws?
Next step: finances. Do the math. Can you afford to buy a new house without selling the house you’re living in? Having a thorough discussion with a knowledgeable loan officer will help you with your financial strategy. (You can use this online mortgage calculator to estimate the monthly cost of your new house.) Consulting with a financial advisor who has experience with investment properties is also wise.
Remember to factor in a realistic cash flow from your rental property to decide whether it will be profitable. A good realtor should be able to help you determine how to set a monthly rental price. Keep in mind, there may be gaps – months where you have no rental income – due to temporary vacancy or a tenant’s nonpayment. Make sure your financial plan factors in these periods of time.
While both short-term and long-term rentals require legal considerations such as local ordinances, short-term rentals will require other considerations and due diligence. Make sure you familiarize yourself with laws, rules, responsibilities, and costs associated with any short-term/vacation rental companies you might use (Airbnb, Vacasa, Vrbo, etc.).
Remember, the rental income is only part of the picture. Don’t forget the costs associated with owning the property. These will be dependent upon how much work you plan to do yourself:
- Mortgage payment
- Homeowners Insurance
- Taxes
- Maintenance and repairs
- Utilities
- Property management fees
- HOA fees
- Broker fees and tenant screening
- Marketing
- Accounting fees
- Business permits
- Vacancy costs
Pitfalls and Rewards
So you have thoroughly done your homework, and you’ve decided you want to embark on this investment opportunity. Here are some additional pros and cons for your consideration.
Cons:
1. Renting Out Might Take Time, Which Means a Gap in Rental Income.
If you are renting an unfurnished house, you’ll need to clear, clean, and prepare for your tenant. If you are renting a furnished house, you’ll need to choose the right amount of furnishings to make a comfortable but uncluttered environment.
Particularly for long-term rentals, you want to choose a good tenant. Although nothing is guaranteed, properly vetting your tenant could avoid headaches down the road.
2. Tenants Can Be Difficult.
No matter how great your tenant looks on paper – or in person – you never really know what might happen. From unreasonable demands, to late payments or raucous parties, renters can cause headaches.
3. Maintenance Issues Are Inevitable.
Although the age of your home and its appliances can alleviate some costs associated with upkeep, be mentally and financially prepared for the unexpected as well as the expected, periodic maintenance. Lawn care, plumbing, roofing, appliance replacements – all require monitoring.
4. Accounting Becomes More Complicated.
Depending on your level of interest and knowledge, you may want to hire an accountant and/or bookkeeper to organize the aforementioned costs associated with renting out your home.
5. Liability Can Be Mentally Exhausting.
The liability of being a landlord can be overwhelming for some. As a property owner, you can be held accountable for injuries that occur on your property. Although most renters are not litigious, some are. Make sure you have the emotional and financial wherewithal to handle potential problems.
Pros
1. Passive Income Is Great!
One of the biggest rewards of having investment properties is the residual income earned. Savvy investors figure out how to make the best profit margins. The income potential can be extremely rewarding.
2. Your Property Will Likely Appreciate.
Given enough time, the value of your rental property will almost always go up. Even if there’s a housing crash, it’s reasonable to expect that the economy will eventually turn around. Buy-and-hold real estate investing can be very profitable.
3. Tax Breaks Are Helpful.
Understanding the tax breaks available to landlords is critical to your success in making the most out of your investment. You may be able to deduct mortgage interest and other fees associated with your loan, as well as costs of maintaining the property. Check with your accountant for a complete list, and ask about deducting depreciation.
4. You May Feel a Sense of Creative Fulfillment.
Particularly with vacation rentals, if you like architecture, interior design, landscape design, etc., owning a rental is another opportunity to tap into your creative side. Even extensive business plans can bring a sense of accomplishment for people with strategic minds.
5. You’ll Meet New People and (Hopefully) Strengthen Your People Skills.
While some tenants can be challenging, it can be interesting to learn about human behavior. Again, particularly with vacation rentals, meeting new people can also be rewarding.
The bottom line: when weighing the pros and cons of renting out your home, remember, you don’t have to go about it alone. There are many people you can consult, from other landlords, to experienced rental agents, to home inspectors and accountants. Leaning on their advice can help eliminate headaches and maximize the value of your investment.
