The Pros and Cons of Owning Rental Property: Is It Right for You?

Over the years, I have had many clients ask me if they should look into buying rental property.  As in most things related to finances…. It depends.

If you watch shows on HGTV, owning rental property can seem like a pretty sweet deal—a steady stream of passive income and long-term asset growth. But like any investment, there are ups and downs. If you’re thinking about becoming a rental property owner, here’s a realistic look at what it entails, including some of my personal real-life examples of potential challenges with tenants.

Let’s first look at the pros of owning rental property:

1.      Steady Income Stream

o    Example: Imagine having a tenant like Diane, who has lived in your rental for many years, pays rent on time, and takes care of the place. This kind of reliable rental income can make rental ownership a dream.  I bought a 3 family in 1982 (Yeah, I was pretty young). I lived on the first floor and the other two apartments were occupied by long term great tenants who always paid on time, were quiet, clean and respectful.

o    You can also count on rent increases over time as property values rise.

2.      Appreciation Over Time

o    Property values tend to rise over the long term. Even if the cash flow is modest initially, the property could appreciate significantly, creating long-term wealth.  Bear in mind, like any investment, there is no guarantee values will rise in the short term and depending on geography, you may see long periods of stagnant growth or even declines in value.  Location, location, location is key.

o    Example: You buy a house in an up-and-coming neighborhood. Over 10 years, the area improves, and your property doubles in value. When you eventually sell, you make a large profit.

3.      Tax Benefits

o    There are tax advantages such as deductions for mortgage interest, property taxes, and depreciation. You may also be able to defer capital gains through a 1031 exchange where you exchange the property down the road for another.

o    Owning a rental allows you to offset some of the expenses like repairs or even accounting fees when filing taxes.

4.      Control Over Investment

o    You can make decisions about improvements, rents, etc, unlike stocks or mutual funds where you have no say in the management.

Now let’s look at the Cons:

Dealing with Problematic Tenants

o    A tenant might miss payments or damage the property. Here is a short list of some of the issues I had personally:

Back in the early 90’s, I bought a second rental property in Somerville, MA.  It was a combination of residential and commercial and needed a lot of work.  One of the apartments came with a group of characters. There must have been 10 people living in the 2-bedroom apartment consisting of babies all the way up to elderly folks.

I had an attorney guide me through the purchase and his advice was to ask for the building to be empty at the closing.

I walked through the house the morning of the closing and the place was empty.  Good so far.  After the closing, I went to the house the next weekend to start doing some work there and noticed activity in that apartment.  Long story short, this group simply moved right back in with all their belongings!

The police couldn’t do anything because they had old gas and electric bills showing they lived there. The seller gave them a verbal notice to vacate so there was nothing in writing.  It took me over 6 months to get them out (And of course, I didn’t receive a dime in rent the whole time). 

They left the place in such bad shape (they even smashed the toilet and bathtub and took the stove with them).

Much more to this story but I’ll save it for my memoir someday.

It doesn’t have to get this bad to cause you sleepless nights.  In my current property, I have had tenants that just didn’t communicate well and issues could have been resolved quicker and at less cost if I knew of problems early on. (After one tenant moved out, the water bill for the house dropped over $400 a month. Maybe they had a laundry business going?)

2.      Property Maintenance and Repairs

o    You’ll be responsible for maintaining the property and covering unexpected repairs.

o    Example: The water heater breaks in the middle of the night, and you’re called to fix it or hire someone at a high cost. These unplanned expenses can cut into your profits.

3.      Vacancy Risk

o    When a tenant moves out, it can take weeks or months to find a new one. During that time, you’ll have to cover the mortgage and other costs out of pocket.

o    Example: Imagine having no tenant for three months while still having to pay property taxes and the mortgage. This can be a major financial strain if you're not prepared. I dealt with this with that Somerville property.

4.      Legal and Regulatory Requirements

o    Rental properties come with legal obligations, such as following local landlord-tenant laws, property inspections, and zoning regulations.

o    Example: A landlord may face legal trouble if there is lead paint present.

So, in conclusion: Is Rental Property Right for You?

Owning a rental property can be a great way to build wealth and generate steady income, but it’s not without its challenges. The key is to go in with your eyes open—understanding the responsibilities of a landlord, the potential headaches with tenants, and the long-term benefits of real estate investment.

Looking at the numbers is just the first step. You must have enough of a down payment that the rental income will cover all the expenses.  Unless you are in a position to make up that potential shortfall every month, buying a rental property may not be a good choice.

One can always hire a management company to handle those late-night calls but you must factor this cost into your budget.

Also ask yourself honestly, are you able to handle small repairs or will you need to hire someone to do that work.

Before you buy a property, think about all the possible scenarios from financial to tenant issues before making a move.

By the way, there are other ways to invest in real estate without these issues and if you would like to learn more about those options, feel free to reach out to me to chat.

Have questions or something I may be able to help you figure out, schedule a quick complimentary call with me by clicking HERE to see my online calendar

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All the best.

Rick Fingerman, CFP®, CDFA™, CCPS®

617-630-4978

Rick@PlanWithFPS.com

Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, medical, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS