There’s a reason why 90% of millionaires invest in real estate. It can help you earn passive income and build long-term wealth.
But the day-to-day aspects of being a landlord aren’t for everyone. Like anything, owning rental properties has its ups and downs.
In this article, we’ll go over the pros and cons of becoming a landlord so you can make an informed decision about whether it’s right for you.
Let’s get started!
Pros of Becoming a Landlord
1. Potential for (nearly) passive income
Rental income is one of the best parts of being a landlord. You get a nice sum of cash each month so long as you keep your rentals occupied with dutiful tenants.
Many refer to this as passive income because it requires little effort. It’s not like a 9-5 job where you have to show up and perform work to get paid.
Of course, being a landlord isn’t totally passive. You still need to arrange for regular property maintenance and tenant management. But if you outsource these to a professional property manager, your rental income can really be passive.
2. Building equity
Most landlords finance their rental property just like regular homeowners do, so they can build equity in it over time.
This allows you to sell your property if you ever decide you don’t want to be a landlord anymore. Or you can leverage your equity to take out new loans and invest in more real estate. Either way, having equity lets you control your investment.
3. Property appreciation
The value of real estate tends to go up over time. As a landlord, you can buy and hold until the prices go up enough that you feel comfortable selling. The longer you wait, the more you’ll profit. This can be a great retirement investing strategy.
4. Tax advantages
Owning rental property comes with many tax advantages. Any expenses from managing or maintaining the property can be deducted. You can also write off home insurance, property value depreciation, home improvements, and interest on your mortgage.
A lesser-known tax benefit is the ability to do a 1031 exchange. It allows you to defer paying capital gains tax when you sell your property so long as you reinvest the money into another “like kind” property. This way, you could flip rental homes indefinitely to build wealth.
Cons of Becoming a Landlord
Now that you know the benefits of being a landlord, here are some of the downsides:
1. Homeowner costs
Being a landlord can cost a lot of money upfront.
First, you have to buy rental property, which are typically harder to finance than regular homes (bigger down payments and higher interest rates).
Then you must pay for maintenance and repairs, marketing costs, property taxes, home insurance, utilities (unless you have renters pay them), and sometimes homeowner association (HOA) fees.
When you add that all up, it can really eat into your rental income and lower your profit margins.
2. Financial risk
As a landlord, you take on a lot of financial risk. It’s just part of the job.
For one, there’s no guarantee that you will keep all of your rental units filled, and an extended vacancy could mean you lose money. Luckily, the US rental vacancy rate has been going down for over the last decade, but that doesn’t mean you won’t suffer vacancies from time to time.
On top of that, the housing market is always fluctuating. For example, the home values in your rental neighborhood could go down. So pay attention to local politics and demographic changes.
Lastly, real estate is inherently illiquid. Selling your property can take several months and requires a lot of paperwork. If you’re unlucky, you could get stuck with a rental property you no longer want.
3. Maintenance and tenant management
As attractive as passive income is, the truth is that many landlords stay busy with property maintenance and managing tenants. Both can be time-intensve and taxing jobs.
On the maintenance side, you’ll need to plan for unexpected expenses (a good rule of thumb is to set aside 1% of the home’s value on annual maintenance). You’ll also need to plan for regular upkeep and long-term repairs (like for the roof and appliances).
When it comes to managing tenants, sometimes you get bad ones that won’t pay their rent on time or at all, damage your property, or start legal battles. In worst case scenarios, they’ll force you to process an eviction, which are expensive and unpleasant.
Other times, you’ll need to take emergency calls from tenants who’ve lost their keys or locked themselves out of their apartments. Then there’s all the time and work that goes into marketing, tenant screening, and other paperwork.
Ultimately, being a landlord can be a big-time commitment—unless you partner with a property manager…
Partner with Green Residential
If you want to experience true passive income with your rental property in Houston or Austin, we have you covered. We’ve been in the local property management business for over forty years. Save yourself the stress and hassle of managing multiple properties and tenants by leaving it to us.
Some Notes on the Texas Rental Market
Why become a landlord in Texas? Texas has 11,112,975 housing units, of which 38% are occupied by renters. That means there is a huge rental market here, and it’s only growing bigger.
Texas’ population growth rate of 15.9% is more than double the growth rate of the nation (7.4%), and big companies like Tesla, Samsung, Oracle, and Google have moved here and brought many renters along with them.
Finally, rent prices keep going up, and in Texas, there are no rent control laws (except in some special cases). So now’s a great time to become a landlord, and Texas is a great place to be one!
Contact us today to learn more and to get a free analysis of your property management needs. We’ll help you take your rental business to the next level.