I have been a rental property manager (landlord) for just over two years now. I’ve learned many things; two stand out:
- Residential real estate can be a great investment. Rental real estate can provide steady cash flow, excellent asset diversification, favorable tax treatment… all with modest capital gains potential.
- Rental real estate can be a real pain to manage at times. Both tenants and repairs cause headaches.
I currently own one rental property through my LLC. Because of item #2 above, I’ve recently turned over the property management to property management company. This choice will probably reduce net revenue about 10-12%, but will help take much of the stress out of finding and screening new tenants and dealing with repairs and tenant issues. If things work out well, I will consider purchasing a second rental property.
In my local real-estate market it is reasonable to expect about 5-6% net income on a fully-owned rental property. And over a 30-year period I conservatively estimate 1.5% appreciation. Further since real-estate prices are a large competent of cost-of-living and inflation, real estate makes a good hedge against real inflation. Finally, just as property values tend to go up, so do rental rates. Simply put, residential real estate is the best long-term inflation hedge I’ve found.
The flip side of rental property is the eventual likelihood of landlord/tenant issues ranging from breaking the lease, to late or unpaid rent, to property damage, to eviction — just to name a few. Vacancies without rent can really take a bite out of your cash flow. Properties can drop in value, and marketable rental rates can fall dramatically.
Somewhat of a wild card is the tax treatment of rental properties. In the “pro” side are depreciation of the structure which can be deducted, and the fact that “passive income” like other investment income is not subject to Social Security tax. On the “con” side is that fact that nothing can offset “passive income” except passive losses (and vise versa). Owner’s of rental real estate (or at least their accountants) will become very familiar with IRS Schedule E of their income taxes.
Rental real estate is not for every investor. Personally I wouldn’t recommend buying rental real estate until you have a minimum of $250,000 net worth. Managing a rental property can be time-consuming and challenging. Alternately, finding a good property management company is also a real challenge. And unlike infomercials and “Rich Dad Poor Dad” author Robert Kiyosaki suggest, real estate is not a financial panacea. However, for some higher net-worth individuals, rental residential real estate is worth considering as part of their investment portfolio.