Many investors are drawn to owning rental property as a means of generating wealth; however, it is not without its obstacles.
While rental properties can help diversify an investment portfolio, they also come with financial and operational risks and responsibilities that must be handled.
A thorough understanding of these risks of being a landlord is a powerful asset for those new to the real estate investment business.
This guide will provide you with that thorough understanding, covering the benefits, challenges, and steps to overcoming the risks of being a landlord and owning rental property.
An Introduction to Owning Rental Property
Rental properties refer to residential or commercial real estate leased to tenants in exchange for rental income.
According to 2024 statistics, there are approximately 19.3 million rental properties in the United States alone. Of these properties, 70.2% are owned by individual investors, 15.4% by LLCs and LLPs, and 1.2% by real estate corporations and REITs.
These individual investors can manage these properties themselves or hire a property management company.
Investing in real estate has long been a means of achieving financial success, which explains the draw to this asset class.
Property value growth can eventually boost return on investment, but it’s vital to consider the obligations and risks of being a landlord, too.
Main Benefits of Owning Rental Property
The potential to earn money from a rental property undoubtedly draws most people to this avenue.
However, several financial, strategic, and lifestyle benefits make rental property ownership an appealing investment opportunity.
1. Steady Rental Income
One key benefit of owning a rental property is receiving consistent monthly payments. These funds can assist with mortgage payments, property taxes, and upkeep costs.
Unlike other market-sensitive assets, rental income generates a more steady cash flow stream.
Rental income can provide a cushion during economic downturns and fund other investment activities such as home improvements or property purchases.
The reliability of rental revenue makes it an enticing option for those desiring financial stability.
2. Appreciation of Property Value
The value of real estate has historically increased over time. This appreciation may increase the total ROI. Increased equity benefits property owners and can be used for additional investment options.
Landlords can take advantage of rising property values by holding onto a property for longer, especially in areas experiencing development or growth.
Appreciation boosts the property’s market worth and makes it easier for the landlord to borrow money for upcoming projects.
3. Diversification of Investment Portfolio
Including real estate in an investing portfolio adds diversification, which may provide more stability during economic changes. Real estate investments serve as a hedge against stock market volatility.
When stock and bond prices fall, real estate investments may keep or even increase in value. This diversification approach lets landlords spread risk and ease their reliance on a single investment source.
For investors looking to balance their financial exposure, real estate provides a tangible asset that is less prone to abrupt shifts.
4. Tax Benefits
Deductions include interest, depreciation, and certain property management expenses. These tax deductions can greatly reduce a landlord’s taxable income.
Property management, maintenance, advertising, and related travel expenses are all eligible deductions.
These tax breaks can boost total cash flow and aid long-term financial planning.
Rental properties present multiple deduction opportunities for landlords looking to decrease their annual tax bill, thereby increasing the investment’s profitability.
Read this article next to learn more about short-term rental tax loopholes.
5. Provides Leverage for Additional Investments
One property’s equity can be leveraged to purchase other rental properties, raising the revenue possibilities. This strategy lets landlords increase their real estate holdings without investing significant upfront cash.
By employing this strategy, property owners can:
- Diversify their revenue sources
- Reduce risk
- Create a portfolio of properties
Leverage, particularly when borrowing at reasonable rates, lets property owners maximize their capacity for wealth-building.
A landlord’s real estate portfolio may expand exponentially due to the “snowball effect” of buying one property’s equity using another.
Don’t miss this article next: Landlord Insurance: Is It Worth It?
Risks of Being a Landlord
While owning rental property can be profitable, it also introduces challenges that can affect financial returns and operational efficiency.
Here are some of the most common hurdles landlords face.
1. Tenant Issues
Late rent payments, property damage, and tenant disputes are common complications.
Managing troublesome tenants might result in additional stress and financial loss. When tenant problems arise, landlords may have to invest time and resources in legal actions.
Another difficulty is handling evictions, including a drawn-out legal procedure that might interfere with cash flow.
Landlords must adhere to certain legal procedures throughout the eviction process, which may delay their ability to rent the apartment again.
2. Maintenance and Repairs
An investment property requires constant care. Unexpected problems can quickly deplete rental income, particularly for landlords without an emergency reserve.
Major crises such as roof leaks, HVAC breakdowns, and plumbing difficulties can cost thousands of dollars to fix.
3. Vacancies and Lost Rental Income
Empty rental units mean no rental income. Unfortunately, this doesn’t stop expenses from adding up, including property taxes and mortgage payments.
High tenant turnover can be costly due to cleaning, repairs, and re-leasing expenses, so prioritizing tenant retention is vital for long-term profitability.
4. Legal and Regulatory Compliance
Local housing laws and regulations will change over time, and it’s important to keep a close eye on them. Landlords who don’t comply with eviction laws, tenant rights, and housing codes risk costly lawsuits, government penalties, and reputational damage.
5. Property Value Fluctuations
Market conditions and property value change alongside one another.
For example, the value of your investment property will often decline due to economic downturns or changes in the local market. This fluctuation can affect your ability to refinance, sell, or leverage the property’s equity.
6. Time and Stress
Being a landlord is not known for being easy. It requires a financial commitment, as well as time and other resources.
Dealing with tenant complaints, maintenance requests, and lease renewals can be daunting. Day-to-day chores can quickly take a landlord’s time, especially if they have many properties.
Hiring a property management company can help ease this stress, but it incurs additional costs.
Comparative Analysis
If you decide to invest in a rental property, you will have to make some important decisions about how to manage it.
Landlords have two options: manage their own properties or employ a property management company.
Self-Management vs. Hiring a Property Management Company
| Aspect | Self-Management | Property Management Company |
| Time Commitment | High | Low |
| Cost | Lower (DIY approach) | Management fees apply |
| Tenant Screening | Landlord’s responsibility | Handled by property management |
| Emergency Repairs | Immediate landlord action is required | Managed by property management |
| Legal Knowledge | Landlord must stay informed | Handled by professionals |
How-To Guide: Rental Property Investment
Being a successful landlord involves meticulous planning and execution to avoid the common risks of the role.
Here’s a quick step-by-step guide of best practices to start you on the right foot.
1. Define Your Budget
Calculate what you can afford without overextending yourself, including the down payment, closing costs, and continuing expenses such as taxes and maintenance. Then, investigate financing choices to determine the best loan for your circumstances.
2. Select the Location
Look for neighborhoods with notable rental demand, convenient access to public transportation, schools, and low crime rates. Market trends can influence your selection.
3. Pick Property Type
Will you buy a single-family home, multi-family unit, condo, or apartment? Consider the unique costs, management needs, and pros and cons.
4. Study the Market
Assess rental rates, vacancy patterns, and property values in the area. This helps you estimate prospective returns.
5. Find the Property
Explore listings, open homes, and off-market options. Look for tenant-attracting features such as contemporary appliances and parking.
6. Inspect the Property
Get a professional inspection to identify issues. Leverage the report to negotiate repairs or lower the purchase price.
7. Make an Offer
Present a competitive offer based on market conditions and property condition. Prepare to negotiate with the seller.
8. Close the Deal
After accepting the offer, it’s time to make things official: finalize your mortgage, sign contracts, and transfer ownership.
9. Prepare the Property for Tenants
Make any necessary repairs, clean thoroughly, and add tenant-friendly upgrades. Clean, well-maintained properties attract quality tenants.
10. Set Rent and Lease Terms
Determine a competitive rental rate with other properties in the area that will generate a reasonable return for you. Then, create a lease that defines tenant obligations, rent amounts, and payment deadlines.
11. Market the Property
Next, you’ll need to market your property and generate interest. To attract tenants, showcase its best features with quality photos and a clear description.
12. Screen Tenants
Check tenant credit, rental history, and employment. Meticulous screening lowers risks like late payments or property damage.
13. Ongoing Property Management
Will you handle management or hire a property manager? If you take on this position, you will be responsible for tasks such as rent collection, maintenance, and tenant relations.
14. Keep Detailed Records
You’ll need to keep detailed records of rent payments, expenses, and profits. These are essential for tax filing and evaluating property performance.
Summary: Successfully Owning Rental Property
Owning rental property allows you to diversify your investment portfolio, earn a stable income from rentals, and profit from property appreciation.
Whether you intend to manage the property yourself or hire specialists, having a clear strategy and understanding of the risks of being a landlord is critical to long-term success in real estate investing.
Do you want to keep learning about real estate investing?
Read these articles next:
- New to Real Estate Investing? Top Strategies for Beginners
- How To Increase Rental Profit Margin
- How Real Estate Investors Use A Cost Segregation Study
