It wasn’t too long ago that buy and hold rentals were the most popular form of real estate investing. While the popularity of this niche has declined in recent years it is still as profitable as ever. Finding the right rental property in the right market can supply the perfect mix of short term monthly cash flow along with long term benefits. For as many investors have taken advantage of rentals there are still quite a few who are on the sidelines. They have heard horror stories about bad tenants, changing market conditions and nonstop management issues. Even though these are the exception rather than the rule this is the impression that many non-rental owners have. Deciding on whether a rental property is for you depends on your real estate goals as well as your resources. Here are a few pros and cons associated with buy and hold rental properties.
PROS:
- Monthly Cash Flow. The first benefit of a solid rental property is the monthly cash flow it provides. This should continue for as long as you own the property. What you do with your cash flow is entirely up to you. One month you may allocate some of the funds for property maintenance. The next you can use it to pay down monthly debt. Whatever you choose to do the cash flow received will be higher than the yield you would receive from a savings account. As long as you take care of the property and find good tenants this cash flow should be available for the foreseeable future.
- Immune To Market Fluctuations. With a long term approach to your rental property you are not as worried about market fluctuations. On a rehab property you are trying to time the market for maximum return. With a rental property you are not as interested in where current property values are. Your goal is to ride out the fluctuations for years until you own the property free and clear or decide the time is right to sell. This allows you to focus on other areas of your business and not stress about the market.
- Potential Appreciation. With rental property investing the focus is on the future. It is never advisable to buy anything based on the potential value but the possibility is there with a rental property. With your down payment as well as ten years of monthly payments you will eat away much of your principal balance. Most markets have stabilized but still not fully taken off. This means there is plenty of room for future gains and appreciation. This makes for a great retirement vehicle or an avenue of forced savings.
- Tax Benefits. There are a handful of tax benefits to consider with a rental property. You have the ability to write off a good number of expenses associated with the property. You also can use depreciation in your favor. With the help of a quality accountant a rental property can be a real benefit come tax time.
CONS:
- Property Management. To run a successful rental property you need to stay on top of it. It is not enough to simply find a tenant, give them a key and wait for rent checks to roll in. There will be maintenance issues, problems with rent collection and trouble finding the perfect tenants. The best way to solve this is by having a dedicated property manager handle everything. This only works if there is enough monthly cash flow left over to fit it in the budget. Regardless of the property management is always a big concern.
- Down Payment. One of the biggest hurdles to investment property ownership is the amount of down payment. Most one or two family investment properties require a down payment of anywhere from 20-25%. This is in addition to the closing costs and prepaid property tax requirements. Once you get into the property you still need funds for repairs, applications and monthly maintenance. With a long term approach you may not get your money out for several years.
- Vacancy Concerns. As a rental property owner you are only as good as your tenants. You can do everything else right but if your tenant stops paying you are in trouble. The threat of a vacancy is always in the air with a rental property. You are only one month away from things getting turned upside down. If you are forced to deal with an eviction not only do you lose the current monthly income but it changes the way you view the property. One bad tenant can have an impact that lasts several months.
- Cash Investment. There is an old expression in real estate that cash is king. When you have a rental property your cash is tied up and at the mercy of the market. Even putting down a large down payment does not necessarily give you the option of taking it out if you need to. Many lenders have made second mortgages or refinancing very difficult to obtain. Plus, there is no guarantee that property values will rise in the future. If you are thinking about a rental property be prepared to have your cash tied up for many years.
There are many investors who have made great amounts of income through rental properties. These investors are more concerned about ten years from now rather than what will happen in the next 60 days. Rental properties can truly change your portfolio for the better but are not without some downside. Before you commit to a buy and hold property you should know exactly what you are getting into
