Considering Investing in Rental Properties?
Rental properties can offer a reasonable return on your investment. But, there are also financial risks associated with purchasing houses to use as rentals, especially for the inexperienced investor.
The first barrier for the would-be landlord is purchasing a suitable rental property. In order to be cashflow positive, it must generate enough monthly income to cover mortgage payments, insurance, taxes, short-term maintenance, and major repairs.
Eric Roberge, a Certified Financial Planner with expertise in real estate, writes in Kiplinger that it's not easy to make money as a new landlord. He says that people often don't realize "how much skill and luck are required to break even."1 Setting financial challenges aside, people who have never owned a rental most likely have no idea how time-consuming it can be.
"Ask any seasoned real estate investor who manages properties with tenants about their unexpected list of duties," says Roberge, "and they will tell you about repairs going massively over budget, evictions and entanglements with the court system, or other rentals-gone-wrong horror stories." Additionally, recent changes to state laws have made it more difficult to find good tenants (restricting screening criteria) while making it more difficult to get rid of bad tenants, even ones who have stopped paying the rent.
Finally, sinking money into a rental comes with opportunity costs—your investment capital can't be two places at once. Money tied up in an income property can't be potentially compounding in a globally diversified securities portfolio. There are times when it's smart to be a landlord, such as renting out a house that would otherwise sit empty. Just be wary of the passive-income fantasies so many are peddling, and if you're thinking about delving into real estate, be sure to talk with us about how it should fit into your long-term plan.
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