By Shirley Martin
Owning a rental property can be a great way to generate wealth for any number of objectives, from the kids’ college tuition to your retirement savings. But it’s not without its challenges. As a physical investment, there will be unexpected expenses, hard physical work, and stress along the way. But, like any investment, if you can ride out the rough patches, a rental property can provide a steady source of secondary income for years. Before you commit to being a landlord, it’s good to understand the pros and cons of managing a rental property.
Pro: Additional income
Supplemental income is a motivating factor for a lot of people who get into the rental market, but there are many other positives as well. A rental property provides an independent income stream that can help you prepare for emergency expenses, cover the operating costs associated with being a landlord, and create discretionary wealth for your family.
Pro: Help is available
A rental property can be a profitable source of passive income, but only if you’ve put a reliable system in place for gathering rent. Worrying about collecting rent every month can be a major source of ongoing stress. In order to prevent it from becoming a problem, consider hiring a property management company; just make sure you find one that simplifies its fees. One of the best ways to pre-empt rent collection problems is to have your property manager thoroughly vet potential tenants by doing background checks.
A rental property can help your family in a number of ways. It can help stave off foreclosure if you get behind on the mortgage, and it can help you avoid selling at a loss. Renting a home can also mean flexibility, enabling you to move wherever you want without having to double up on mortgage payments.
Maintenance can become a considerable source of stress and a significant drain on finances. If you’re planning to rent out a property, be aware that maintenance expenses for a rental property are generally higher than for a property occupied by a homeowner (renters often don’t care for a rental property as well as they would a property they own). Again, bring in a property manager to help handle the expenses.
Con: Troublesome tenants
You can vet all you want, yet still wind up with difficult tenants. People sometimes lie on rental applications and misrepresent their personal, employment and financial backgrounds. Despite the many tools at your disposal, important details may still slip through the cracks. People who seem kind, considerate and honest can prove to be a real nightmare. The best approach for a rental property owner is to trust but confirm the information tenants provide. In most cases, if you’re diligent about researching potential tenants, you can avoid problems later on.
Con: Business expenses
Remember, owning a rental property is a business. As a landlord, you can expect to pay anything from legal costs to tax advisory fees and business formation expenses. Hopefully, you won’t have to deal with vacancy and the loss of revenue it represents, but you need to be prepared for it. The more you plan ahead, the better prepared you’ll be for adversity and the costs of doing business.
Your business can gain protections by forming a legal business entity. One of the most popular choices is an LLC. Between personal liability protection and flexible tax benefits, an LLC is a great choice for a rental business. Forming a Georgia LLC is also a fairly easy process with the help of a formation service. Typically this takes no more than five steps.
Being a landlord isn’t a path to easy money. It takes work, and there will be stress and frustrations along the way. Once in a while, tenants will cause problems, you’ll face unexpected maintenance issues, and it may be necessary to hire a lawyer from time to time. But with careful planning and due diligence, you can enjoy a self-empowering source of revenue for many years.