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Should You Invest in Rental Properties?

Should You Invest in Rental Properties?
(Andrii Yalanskyi/Dreamstime)

By Friday, 21 August 2020 05:03 PM Current | Bio | Archive

Real estate has a proven track record as one of the safest long-term investments. Few other assets can provide the same advantages as investment properties, such as tax benefits and consistent cash flows. Investing in real estate, however, can take many forms, with different levels of financial commitment and involvement. One of the most common types of real estate investments is rental properties.

Rental properties can include any type of dwelling that can be rented or leased to one or multiple tenants for residential and commercial purposes, for any length of time. They cover anything from a rented single-family home or condo to large apartment complexes, vacation rentals, industrial and retail buildings, and so on.

With relatively low financial entrance barriers, rental properties attract both beginner and veteran investors. Thanks to their versatility, they are an excellent opportunity to establish and diversify a real estate investment portfolio. Rental properties can also provide a great source of passive income.

Nevertheless, being a landlord is not without its issues. We all have heard horror stories, from nightmare tenants to properties sitting vacant and midnight emergency calls. Like any form of investment, rental properties come with their pros and cons.

Is investing in rental properties the right move for you? Here are some things to consider before calling your real estate agent.

Advantages of Rental Properties

There are several reasons why rental properties are a popular real estate investment. When done right, they are versatile, produce a reliable and predictable cash flow, and increase in value over time.


Everyone needs a place to live. Unlike many other assets, the demand for rental properties remains high despite the ups and downs of the market. In fact, demand for rentals may increase in a depressed economy as homeowners may decide to sell their house to reduce their expenses or lose their property to foreclosure.

Being a landlord is the best way to significantly reduce or eliminate your living expenses by living in one of your units or occupying it as you renovate before leasing it. One of the reasons rental properties are a popular choice among beginner real estate investors is that they can provide a steppingstone for financial independence.

If you are willing to use part of your investment property as your primary residence for at least two years, you may have access to multiple tax benefits. Your tenants will pay part or totality of your mortgage in the form of rent as your equity in the property grows. After a couple of years, you could be in a position to buy another investment property.

It is easy to create a diversified portfolio of rental properties. You can mitigate some of the risks of real estate investment if one of your buildings is not performing well by buying properties of different sizes, varied use, and in multiple locations.

Consistent Cash Flow

Rental properties that are professionally managed can produce a reliable and predictable cash flow, which opens the door to financial independence.

Expenses, such as maintenance, property taxes, mortgage, and so on, are usually consistent over time as long as you take care of establishing a sinking fund for major repairs. Significant elements of a building, such as the roof and HVAC system have a finite useful life. A smart investor will set aside a determined sum every month so these expenses can be covered over the lifespan of each fixture. Meanwhile, you can count on the income from your tenants' rent to cover these expenses and, optimally, produce a positive cash flow.

The more units you own, the more likely you are to produce a consistent cash flow. Some unfortunate events - such as vacancy or expensive repairs - are unavoidable. As your rental property portfolio expands, however, buildings performing well will compensate for the ones that are having issues.


Rental properties produce a cash flow that can cover the building expenses and mortgage, and they also tend to increase in value over time as your equity grows. It is not an overnight process, though. In the long term, however, you may be able to resell your property for a profit or refinance it and use the equity for your next real estate investment purchase.

Keep in mind that selling a property comes with expenses. You will need to do your research on the typical closing costs and the average real estate commission rate in your area before settling on a sale price. Using a seller’s net sheet will help you keep track of how much you can hope to clear from the property sale.

Inconveniences of Rental Properties

Despite the undeniable pros of owning rental properties, being a landlord is not for everyone.

Sooner or later, you will have to deal with difficult tenants. Managing and maintaining your investment properties may prove to be more than what you signed up for, and your buildings may fall short on your expectations.

Troublesome Tenants

The main downside of being a landlord is, without any doubt, having to deal with bad tenants. It is only a matter of time before you run into issues such as late or unpaid rent, damaged property, or confrontational behaviors. It can be emotionally taxing, and remaining calm and professional is far from easy. Besides, undesirable tenants will also affect the profitability of your rental property.

To avoid bad surprises as much as possible, be diligent about tenant screening. Be friendly but firm when it comes to setting rules from the get-go. You will also need to be prepared to make a tough decision, such as evicting a tenant without delays.

Although it is never easy, your livelihood depends on the rent being paid on time and in full every time.

Challenging to Manage

Rental properties have the reputation of being excellent sources of passive income. In an ideal world, your only interaction with tenants would be to collect rent. However, any landlord will tell you that it is a far cry from reality. Managing a rental property can quickly be overwhelming and feel like a full-time job, especially if you have multiple units, some maybe out of state.

Unless you are hiring –- and paying for -– for a property management company, tenants may contact you whenever there is an emergency, regardless of the day or time.

You will also need to stay on top of the building maintenance and set up a reliable network of contractors willing to help as needed. You will also have to deal with the administrative side of things, including making sure that rents are collected, bills are paid, and there is a smooth transition between tenants.

Thankfully, technology is catching up with the reality of juggling the multiple obligations of landlords and property managers. You can now find tools, such as property management software for scheduling, to make your life a little easier.

Non-Performing Rental Property

Sometimes, things do not work out as planned. This is particularly true when it comes to investments. Whether it is due to a miscalculation on your part or an unfortunate change in circumstances beyond your control, you may find that you are losing money on your rental property.

In some cases, you may be able to salvage your investment by adjusting the rent, for example. It is just as important, however, to recognize when to let go of an investment property before more damage is done to your wallet.

Whether you should invest in rental properties depends on your expectations and the opportunities you may encounter. When choosing the perfect rental property, be aware of the sale price and rental income. You will also need to keep a close eye on the local real estate trends and politics and be prepared to adjust your plan as needed.

When done right, rental properties can present a tremendous opportunity for real estate investors, but the reality of being a landlord is not always rosy.

Dr. Francesca Ortegren, Ph.D. is a Research Associate at Clever Real Estate where she focuses on helping people understand complex data, real estate, finances, business, and the economy by researching various topics, analyzing data, and reporting useful insights for general consumption.

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Whether you should invest in rental properties depends on your expectations and the opportunities you may encounter.
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Friday, 21 August 2020 05:03 PM
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