Real investors often tout the many advantages of owning rental property. But what is it really like to own rental property? To get a more complete picture, we’ll go through a list of pros and cons of rental property ownership.
Rental Property PROs
- The investor is in control. This means the investor will be responsible for upgrades, collecting rents, tenant issues, selecting properties, etc.
- The investor decides which properties to invest in.
- Potential tax advantages. Investors can declare depreciation expenses, operational expenses, loan interest expenses, and more.
- Rental properties have a higher barrier to entry, which can limit competition.
- Own real property as opposed to a financial instrument, such as a stock.
- Putting more time and research into prospective properties and rental property management can pay off.
- Real property is historically less volatile than stocks. This is mainly due to the illiquid nature of real property.
- If there is equity in the property, an investor can take it out (i.e., HELOC) to invest in other opportunities.
Rental Property CONs
- Must manage property, which is time-consuming.
- Must market the property to keep vacancies low. The reputation of property management is also crucial for filling vacancies.
- Requires some real estate expertise.
- Much higher transaction costs than publicly traded stocks. This is mainly because real estate is a private market.
- Very illiquid.
- Requires large capital investment (i.e., down payment) and, in some cases, additional investors.
The above list isn’t exhaustive but provides a good overview of the pros and cons of rental properties. If you are one who needs control and wants to be hands-on, you are probably the ideal person for rental property investing. Because you’re the one selecting which properties to buy and how they are managed, the performance of each property is up to you rather than someone else.
Having so much control over the investment means you can scale up fast or slow. You are also the person who will determine if the investment succeeds or fails.
