02/17/21

Real Estate Insights

The Pros and Cons of Owning Investment Properties

If you’ve ever rented, I will bet that owning rental property sounds pretty great, right? In some ways, you’re earning money while you sleep. And diversifying your income can stabilize your financial position without having to put in more hours at your 9-5. But nothing worthwhile comes easily. Here are a few things to consider before taking the plunge into becoming a landlord.

Pros:

Extra Income/ Cash Flow

Buying a rental property doesn’t usually mean you can quit your day job. At least not right away. But it does mean that you can make extra income outside your 9-5. Diversification in your income sources is a great way to grow wealth and provide yourself and your family financial stability. As we’ve all learned from 2020, life is unpredictable. You never know what it has in store for you. It’s comforting to know that if you experience unexpected job loss, you’ll still have income coming in. Investment properties can help you pay your bills and can see you through until your next opportunity. And when your career income is stable, you have extra cash flow at your disposal.

Appreciation Over Time

Between 1975 and 2021, home prices in Wisconsin have steadily increased. Earn rental income over ten years while your home increases in value. Then sell when the market is primed for maximum R.O.I.

Hide Money From Yourself

You can’t splurge-spend your savings account during a weekend at Ho-Chunk Casino if you’ve invested that money instead. Pouring your piggy bank change into a rental is a great way to guarantee you don’t spend your funds unnecessarily.

Tangible Asset

You are in control of the success or failure of your investment. You have the power to increase your wealth based solely on your motivation to make improvements. These improvements can increase the rent you can reasonably charge. It’ll also increase the value of the home, for whenever you’re ready to sell.

You’ve Got Options

Owning an extra property means that your living situation has a contingency plan. If the market is suddenly HOT in your primary residence, you can take advantage of an easy sale. While still having a backup place to live until you find your new dream home.

It also means you have a place available for family and friends if they’re experiencing hardship. The gift of a safe, secure place to live until they are back on their feet is priceless to an empath. The odds are we will all experience unexpected hardship at some point in our lives. If you’ve experienced it already, you know how impactful an act of kindness can be.

You’re In Charge

Yep, that’s right. You have the power to set your rent prices. To choose your tenants and buy, sell, or rent on your terms at your own time.

Cons:

Unpredictable Tenants

There’s no guarantee that your tenant will be respectful of your investment. Often it doesn’t matter if you have a rock-solid lease agreement. Tenants may still knock holes in your walls. They might smoke indoors. Or park on the lawn, ruining your landscaping. Or any number of things that are a headache to you (and your wallet).

There are several things you can do to help you get the best possible tenant. Background checks and credit checks are essential. But so is researching their internet presence and following through with their references. But even still, you don’t honestly know a person until you have them living in your home.

Late-Night Phone Calls

Emergencies happen. And they don’t always occur within business hours. One negative aspect of being your own boss is that you’re never off the clock. You may get a phone call at 3:00 am with an urgent phone call.

Increased Repair Time (And Money!)

Even if your tenant is a dream, you’ll likely still have to spend more money and time on repairs than if you were living there yourself. Very few tenants will have put forth the same sense of ownership and care into a property as an owner would. Even tenants with the best intentions may not know much about home maintenance. They may not know to contact you about an issue before it becomes a big problem. You’re more likely to have more wear and tear on your property overall.  At the very least, you are patching holes, painting, and deep cleaning before each new tenant moves in.

Lawsuit Risks

Getting into this business means that you have a higher chance of lawsuits and all the headaches that go with them. Some common investment property lawsuits are:

Eviction

Sometimes evictions are unavoidable. But if you don’t follow the exact eviction protocols, it can be turned against you instead of the tenant.

Property Damage

A landlord can sue their tenants if the damage to the property exceeds the security deposit. 

Unpaid Rent

Not finishing out the lease or abiding by lease terms can also result in a lawsuit.

Holdover Tenants

Sometimes, after a lease has ended or eviction occurs, a tenant will refuse to leave the property.

Breach of Quiet Enjoyment

Breach of quiet enjoyment means that a tenant has a right to enjoy the property without landlord interference. This includes not entering the property without notice or permission and or altering the utilities of the property.

Landlords have rights. But so do renters. It’s worthwhile to learn the details. If you tread carefully, you’ll be less likely to have the potential for lawsuits.

No Guarantee of a Tenant

Rental competition has been fierce in recent years. But you may go a few months without a tenant. In which case, you’re responsible for the mortgage and other bills without any added income. Vacancy costs are typically 5-10% of the annual rent.

Taxes & Fees

Standard property taxes will apply to your rental property. But this is pretty easy to take care of as many banks will escrow for your property taxes. But you’ll also be taxed on any additional income that you make from your investment property. So be prepared for this once tax season rolls around.

Consider Property Management

If you want to avoid some of the headaches of owning an investment property (ie, coordinating repairs, handling showings, qualifying tenants, and taking those late-night emergency calls), you can always consider property management. Madison has several great ones. Get in touch with us for a recommendation on property management companies.

Are you interested in purchasing an investment property? A little nervous about some of these bullet points or not sure where to start?  We have first-hand experience with rental properties, owning over 40-units ourselves, and ranked #1 in 2020 for total multi-family sales in Dane Co.  We would love to put our experience and knowledge to work for you and have a team dedicated to this specific market niche.  They live and breathe this stuff. They know what to look for, how to calculate the numbers, what to estimate for rents, what to estimate for improvements, etc. Get in touch with us today.