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What are the pros and cons of owning an income property

Posted by Hughes Group Blog Team on Sunday, August 5th, 2018 at 2:00pm.

 

As times change into a seller’s market it has become a common practice for many to go into business and get rental properties. It can be a great livelihood and can allow more time to do what one wants verses being stuck in an office several hours a day. However, there can be some downfalls as well. Before going into such a business or even getting one income property it is important to know the pros and cons of the income property business.

Pros of income properties

The greatest benefit to having an income property would be the income from the renters, which therefore provides a direct income. It is important to set up a business account and the checks you receive from the renters monthly should go into that business account. In a ideal world allowing an offset of expenses that may come up that month.

An example of this is, say you bought a home in which you rent for $1,000 a month, said house if occupied for the full year would allow for $12,000 to be put into the business account.

One may argue that with that much of an income coming in that it might be worth it. One might want to go into it with a positive outlook, even if one can have the place rented for seventy-five to eighty percent of the year it would bring in over $9,000 a year, which is pretty good.

Changing demands (depending on the area) will lead to a gain due to the increase in property values which happen over time. Although, the property might not go through any changes because you own it you still gain the value. This, of course, would not be a for sure thing as it is by variables such as the area the rental is located in. One will find some areas the value might rise greatly in just a few years and other areas it might stay flat. In the ideal world, the growth of value will go with inflation at the least. If the income property is located in the higher end of the area the increase may even beat the inflation. If the income is in an area that is lower than average there might not even be an increase that will beat the inflation.

Other factors one may want to consider would be sweat equity. Sweat equity will most likely add value as you decide to maintain and upgrade the property. For example, making sure the outside of the house is painted or new siding is added or updated, the inside is refinished, basic yard work or landscaping, etc.

The sweat equity along with the increase in property value will allow one to raise the rent at will and set up a great place for selling if one chooses to do so.

For those who are handy or might love learning how to do projects such as home improvements, having a rental property would be the ideal attraction. Learn or use the skills when the property is purchased, when the tenants leave or upon getting ready to sell the property.

Cons of income properties

One of the disadvantages for many people of owning an income property is the concentration it takes on their assets. The reason for this is it might take a great portion of one’s net worth to completely own the income property.

The issue with the concentration is it does not diversify at all. The investment is of a specific house located in a specific neighborhood, block and city. If the off chance the neighborhood it is located in has a tumble one who owns the property in the said neighborhood will be out a large amount of money. Especially if something happens in which the insurance does not cover.

It comes down to the decision of whether you want to tie yourself and your assets to the real estate market in which the property is located in. It is may not wise to go into an investment strategy using concentration of assets. Although, this will not be a factor if one is wealthy or if the property grows into an instrument for diversification instead of an item one is concentrated in.

There is always a risk that you will not be able to rent the property, renters will not pay or will be late in turning in rent including the  risk of the tenant leaving in the middle of the night without a word. There is no guarantee of the revenue stream.

There may  be times you will have the ideal tenant who treats the property well, who pays on time, who is ideal in every way but this is also not guaranteed. Some tenants may cause more damage than others or will have more wear and tear than others.

Another disadvantage is the taxes, fees, and insurance. Property taxes, the insurance for the property as well as homeowners association fees (if you purchase a property that has them) you will still be responsible for this despite if you have a tenant in the house.

These costs are recurring and something you can always count on and may rise depending on the real estate market/city. Although, they may not be insignificant such as the insurance on an income property is normally about twenty five percent higher compared to a normal policy a homeowner who lives in the home would pay.

 

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