Owning rental properties can be a fantastic way to build wealth and leave a legacy for your children. Let’s review the high-level pros and cons of owning and managing your own rental properties.
While I certainly believe that almost everyone can manage a small portfolio of rental properties if they put their mind to it, I also realize it’s not for everyone. In order for investing in rentals to be “worth it,” the pros have to outweigh the cons, but the weight you give each factor is different for everyone.
Pros of Owning Rentals
- Additional recurring revenue
Rental properties create an independent revenue stream that can cover the operating expenses of the rental or even generate wealth for you and your family.
- Tenants paying your mortgage
The rent you receive will help pay down or pay off your mortgage.
- Tax benefits
You’re able to claim significant income tax deductions because of your rentals.
Related: Top 15 Tax Deductions for Landlords
- Passive side income
If you have the proper rent collection tools in place, rent can be a passive income stream, allowing you to focus on other things in life. In my opinion, the average person could typically manage between one and five properties while still keeping their full-time job.
- Allows you to hold onto the property
Converting a home to a rental property can prevent the loss of the home due to foreclosure or from being forced to sell it at a loss by generating income. Renting out your home can also allow you to move to another house, city, or country without having to float two mortgages or house payments.
- Independent of health
Building equity through rentals can be independent of age, sickness, or circumstance. It can provide income during requirement or if you are physically unable to work. You may need to hire a property manager though if you are completely unable to participate in the management process.
- No shortage of renters
The number of renters (your customer) in today’s market is increasing, and they are in every state, city, and town in the U.S.
- Low risk
Even if the economy collapses, people will always need housing.
I think it is possible for most people to self-manage and self-maintain a rental property. However, even if you’re not “handy” with tools, you can always hire out the repair. You certainly don’t need a property manager to coordinate a plumbing repair. Almost anyone can make a phone call, and the tenants can give the plumber access to do the repair.
Cons of Owning Rentals
- More wear and tear
Maintenance expenses on a rental are typically higher than they are for a homeowner occupied property because people often don’t treat a rental as well as a home they own.
- Unqualified renters
Sometimes you’ll have to deal with people who aren’t worthy of loans or any credit whatsoever. They might lie on an application and waste your time. Roughly 20% (1/5) of my applicants lie about their credit and background check history prior to seeing the screening reports.
- Inevitable lawsuits
If you own a rental, you will eventually get sued, even if you didn’t do anything wrong. Period.
- Tougher to sell
Selling a home while it is occupied by a tenant could lengthen the time it takes to sell and decrease the amount of money a buyer is willing to pay for it.
- Additional costs
Plan on increased expenses for legal fees, legal documents, business formation, CPAs, advisors, vacancy, etc. A rental is a business, which comes with extra business expenses.
- Additional stress
At times, especially during a vacancy, rentals can be extremely stressful. Sometimes, a spouse won’t be so excited about your rental efforts, and it can cause marital stress.
Hiring a Property Manager
If the cons seem too scary, and you shiver in fear of the midnight clogged toilet (which has never happened to me in 11 years of owning rentals), then you could offload the management to a professional property manager. However, it will cost you dearly. In fact, it will likely cost you 17% of your rental income after all fees are calculated in.
The average property management company takes one month’s rent whenever they find a new tenant for you, and then they take 10% of rent every month thereafter — totaling 17%.
- Should I Hire a Professional Property Manager?
- Top 20 Questions to Ask Before Hiring a Property Manager
Alternatively, you might be able to find a local à la carte property manager, which is a great way to hire out specific services, such as key exchanges and showings, but you will still do some of the work.
The good news is that you can do all the hard parts, like screening and rent collection, through Cozy — and it’s free. Seriously, it’s free. I use Cozy to self-manage my own rentals, and I only hire a property manager when I need someone to be on the ground at a property. So far, it’s worked great and has saved me over $30,000 last year in management expenses.