By: Shirley Martin, Tidy Life Today
Whether you have inherited a property or you have some extra money and are thinking of investing in one, many people are faced at some point with the possibility of going into the rental market. A rental property can be an excellent financial asset, but it is important to fully understand all the implications of your role as a landlord before jumping into things. In this article, we will explore the main pros and cons of this decision.
The team of professionals at Nona Title offers title insurance and settlement services in Florida for all types of real estate transactions. To learn more about our services, call (407) 556-3798 or complete this form online.
Pro: You Can Supplement Your Income
This is probably the main reason anyone invests in rental property. The monthly rent represents a good source of extra income, and it can sometimes even fully cover the cost of the mortgage.
When deciding how much to charge for rent, a good rule of thumb is 0.8 percent to 1.1 percent of your property’s value — unless it is worth more than $350,000, in which case you are better
off charging lower since your home could become unaffordable. Make sure you are charging a reasonable rate for your area and for the quality of accommodation you are offering.
Con: Maintenance and Management Can Be Stressful
Being a landlord is not an easy job. There is a significant time commitment to maintain the property and manage your tenants, which can be quite stressful.
One way to counter this stress is to hire a property manager. The right agency will take care of the ongoing maintenance of the property, but also the tricky management parts like finding suitable tenants and collecting rent.
Pro: It’s the Most Reliable Form of Asset
Having an asset in the form of real estate is one of the most efficient ways to build wealth for your later years. When compared with other types of investments, like stocks and bonds, real estate can make you more money with less capital. Other benefits of real estate investment include regular cash flow, the expected appreciation of your assets over time, and the fact that its rise in value tends to coincide with retirement.
Con: Your Assets Aren’t Liquid
A rental property may be a great asset, but the lack of liquidity could be a problem. If most of your net worth is tied into a house, you can’t use that money for any expenses that arise.
If you are going to invest in property, ensure you also have savings or other types of investment that are liquid, such as stocks and mutual funds. This is especially important for emergencies (since retirement savings aren’t time-sensitive). Bankrate estimates that you should have somewhere between $10,000 and $20,000 in emergency savings at any given point in your life.
Pro: Tax Benefits
Landlords can benefit from several tax deductions. These include interest on the mortgage or any credit taken for the property, repairs, contractors, legal services, and even the travel you do for the purposes of managing your property. Some homeowners also choose to purchase their homes as an LLC for tax benefits and to shield themselves from possible litigation. Forming a Florida LLC might seem like a daunting task, but with the help of a formation service, the process can typically be completed in five steps.
Con: Rising Taxes
When you buy a property, you agree on a given mortgage and interest. However, things like taxes and insurance could rise at any moment, leaving you in a more financially vulnerable situation. Also, bear in mind that, since 2018, you can only claim up to $10,000 in state and local tax deductions.
Overall, property continues to be one of the safest investments. However, it is important to acknowledge that it is not an easy investment to manage and that, like any investment, there is a risk involved. This shouldn’t put you off buying a rental property. On the opposite, it will help you be smarter about it so you can enjoy the benefits for years to come.