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Pros and Cons of Rental Property

Ownership of Rental Property

It can be very beneficial when done in the right way, but there are pitfalls which can occur. This blog discusses the pros and cons of rental property when owning one.

First, the Positive Aspects:

Rental income can pay off the property over an extended period of time.
Certain rental expenses are tax deductable.
Rents tend to increase over time, leading to increased income.

Now, the Negative Aspects:

There are likely to be expenses from time to time, such as repairs.
The renter(s) could potentially damage the house.
The renter(s) could make habitually late payments or skip out.
If a renter doesn’t renew the lease, there is time and effort involved in cleaning up the house and finding new renters.

With regard to the positive aspects, owners or rental property can realize large gains over a long period of time, both in terms in rental income increases and property appreciation (regardless of the recent real estate bust). Expenses such as repairs, maintenance, mortgage interest, property taxes and personal expenses involved the active ownership, such as travel expenses to and from the property for inspections, etc. are tax deductible. A person can make a living off of rental properties if there is enough income to offset expenses and the cost of living. This usually involves owning multiple properties which have no mortgages or mortgages which have a relatively small principal amount to begin with.

The negatives of rental property ownership must be considered also. If a tenant isn’t screened properly or at all, it could result in headaches, such as trying to collect late payments, a tenant not paying rent, resulting in an often lengthy eviction procedure during which no income is received, and/or a tenant causing damage to the home. Because of this, tenants must be screened carefully. A screening agency could be used for this, although that is not a guarantee that a “bad” tenant won’t be selected. Use of a screening company (check the Better Business Bureau with regard to these companies) should reduce the probability of a “bad” tenant being selected.

As for the rental contract, it is best if a lawyer or tenant screening company is hired to do this. The contract should be comprehensive and include basic items such as when rent payments are due, as well as state the amount of any late payment charges. It should protect the landlord in the event of breach of contract by the tenant(s), such as not maintaining the property or repeated late rental payments.

In addition to the screening process, a landlord must arrange inspections to the property, at least twice a year. It is not uncommon for tenants to damage a home, but periodic inspections can lower this possibility considerably. This involves going inside the home as well as outside. All rooms should be inspected. This inspection process should be conprehensive enough to result in a clear idea as to the condition of the home and property.

There are companies which manage the tenants for landlords. These include screening rental applicants, collecting rents, and informing the landlord on various matters pertaining to the property. They normally charge a monthly fee, which should be considered when deciding to hire a company to manage the property. In addition, the landlord should be there in person when a house inspection is made, to qualify for tax deductions, since a “passive” landlord is not allowed the tax deductions normally applied to rental properties. An “active” landlord can take the usual tax deductions.

In cases where landlords don’t want to have to find new tenants every so often, such as every year or two, a longer lease period could be considered. This would involve either keeping the rent the same for a period of a few years, such as with a four-year lease, or incremental yearly lease increases as agreed between the prospective tenant amnd landlord. This would apply to “good” tenants who have made timely rent payments for a year or two, and usually not to new tenants unless the new tenant has been screened thoroughly and has a very good credit history.

In summary, rental ownership can be very rewarding, or it could result in nothing but headaches. The amount of effort and due diligence of the landlord, both in selecting tenants and managing the property, can make a great difference in determining the outcome of rental property ownership for that particular person.

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