Owning Rental Property is a popular investment choice for anyone looking to build wealth and create passive income. There are a lot of advantages to owning rental property, but there are also downsides that don’t get written about much. Most literature and information about real estate investing focuses on all the reasons why you should do it. They don’t talk about the potential downsides because discouraged people won’t buy real estate investment books and seminars.
I’m currently experiencing a big con (late rent, possible eviction) but I want to share my experience so you can avoid the same mistakes I made with owning rental property.
So let’s start with all the reasons why I chose to own rental property.
- According to the Pew Research Center: More US Households are renting than at any point in 50 years
- Owning Rental Property allows you to build Equity and positive cash flow with other people’s money
- People will always need a place to live
- ManyTax Deductions to lower your overall tax burden
- Depreciation for Rental Real Property
- Employees, Independent Contractors, Legal and Professional Services
- Creates Passive Income Stream if you have positive cash flow
- Increases over time (rent increases)
Here are the reasons owning rental property may not be for you:
- Dealing with difficult tenants is not for everyone
- Late on rent
- Destroy property
- Cause disturbances at night
- Not as passive as other investments
- Choose to hire a property manager to avoid most of the work but beware; it’s hard to find good property managers. They’ll never care as much as you do about your property.
- Need a lot more cash to start owning rental property than other investment vehicles
- Out of pocket expenses are much greater than other investments
- Repairs and renovations
- Delinquent rent payments
I’m currently dealing with a tenant who’s two months late on rent, still owes me the security deposit and last month’s rent. They have people living with them who aren’t on the lease causing all sorts of parking issues with other residents in the building.
Unfortunately, the situation has deteriorated to the point where I am pursuing an eviction. This is the last thing I expected to do with my first tenant ever. The process will be handled by my real estate lawyer, which, is not free. Not to mention the stress of dealing with the tenant and floating the mortgage this whole time.
I made mistakes to get myself in this situation because I was in a rush to get the unit rented. My wife and I were expecting the birth of our second child and I wanted to get the condo leased. We now know it’s better to have the unit empty than being stuck with a bad tenant.
Here is what I would do if I could hit the re-start button.
- Establish rules, protocols, policies upfront and make sure both sides adhere to them.
- Get help in finding the right tenants. Property managers can be valuable and worth their price by finding reliable tenants for you. Referrals are also a great source from trusted people in your network.
- Stick to your late payment penalties.
- Establish how you want to get paid (check, pick up, mailed, direct deposit, etc.)
- Do as much due diligence on applicants’ – credit report, references, employment history
- Don’t get sucked into your tenants’ personal lives. It doesn’t matter why they don’t have the rent money. The only thing that matters is that they don’t have the rent for you. You need to have the skin to say Not my Problem.
This has been a hard, but important lesson for my wife and I. I want to get this tenant out and gain possession, of the condo, back as soon as possible. We’ll hit the restart button and look for our next tenant. Silver lining is that we’ll get to deduct these expenses from our taxes for a lower tax burden.