The Realities of Income Properties

Many homeowners invest in an income or rental property as a means for extra income, and generally real estate is a solid investment when it comes to long-term return on investment (ROI). As with any kind of investment, there are advantages and disadvantages to income properties. If you’ve been toying with the idea of investing in another property, consider some of the points below before making your final decision.

Advantages of Rental/Income Properties

Direct Income Stream

The biggest advantage of an income property is a direct income stream. Monthly rent checks go directly to you and, depending on whether the property is mortgaged, go directly into your business account. If the property sits within a highly competitive real estate market, you may see even bigger returns due to marketing competitiveness.

Property Value Increases

One of the biggest draws for real estate is the expected property value increase over the long term. Real estate can be a long or short game – depending on your location, you could see the property value increase within a couple years; in other markets, it may take longer, but the property will inevitably increase in value over time.

Sweat Equity

As you maintain and upgrade the property, you’ll likely recoup some of the costs you’ve put into it. Regular maintenance (things like exterior painting, new siding, upgrading a roof, landscaping, etc.) help to increase the overall value of the property. Pair sweat equity with a property value increase, and the overall value of your investment property should grow well beyond your investments.

Tax Deductions

As a property owner, tax deductions are always a good thing, and it’s no different with an income property. With the current guidelines, property owners have the ability to write-off interest on the mortgage or credit card used to make purchases for the income property. Things that can also be written off: insurance, any maintenance repairs, expenses for travel to and from the property, any legal or professional fees, and of course the property taxes.

Disadvantages of Rental/Income Properties

Risk of Asset Concentration

For many of those interested in a rental or income property, the ability to purchase the property outright is not a reality. Many owners will need to have a mortgage on the property; and for those able to buy in cash, the amount needed will likely eat into the majority of a person’s total net worth. Because of the huge concentration of assets in one item, there is a potential to see no return on the initial investment, especially if the real estate market as a whole takes a drastic turn or the economy goes into a recession. If you’re looking at an investment property as an investment, having the majority of your assets concentrated in one item is not advised and a poor investment scheme.

Tenant Issues

The only way to make money off a rental or income property is to have tenants. While the Internet provides a number of ways to find tenants, as a property owner you want your tenants to be responsible (pay the bills on time, take care of the property, and are long-term renters). Finding the right tenant can be a process: from running advertisements to credit and background checks – the tenant process can take some time and can cost a property owner a considerable amount in a short time. Should the tenants end up being a nightmare, you’ll see additional costs to fix any wear and tear.

Taxes, Fees, Insurance

Regardless of whether or not the property is rented, as the owner you’ll have regular payments for property taxes, home insurance, HOA fees, and regular upkeep. Property insurance on rental properties can be higher than non-rentals, and overall taxes, fees, and insurance eat into the overall income generated by the property. You might be able to write some things off on your taxes, but that only happens once a year, not every month.

Being Involved

One of the biggest parts of owning an income property is maintenance. Maintaining the property is a challenge, especially when it has to be done regularly. From major appliances to structural components like the roof or the driveway, the property owner maintains and covers the cost. If you have tenants that don’t like fixing things, it’s likely you will be called when something goes wrong – from a clogged toilet or sink to leaking appliances or major property damage. Not only does maintenance take time, it also takes money.

Rental or income properties come with a good balance of advantages and disadvantages. Whether you’re looking for a simple single-family property or an entire condo building, you’ll need to have a good baseline knowledge on what to expect when you make your first move toward an income property.

If you’re looking for potential rental properties, I’m happy to help you navigate your local real estate market. Don’t hesitate to reach out with all of your real estate questions: I’m here to help!