Rental Houses: How do you know this is good for you? I’ll address the major advantages and disadvantages to enable you to weigh your options.
The advantages to owning a rental property are relatively few, but they’re powerful. To put it simply, if everything lines up well, you can make a lot of money from a rental property.
1. Income from rental houses
The biggest benefit of owning a rental property is that the renters will provide you with a direct income stream. Those monthly payments go straight into your business account, ideally more than offsetting any expenses for the month.
2. Rental Houses property value growth
In addition, since you own the property, you stand to gain from an increase in the property value over time due to changing demands in the area, even if the property doesn’t undergo any changes. This is obviously going to be a variable thing, as it depends heavily on the area where your rental property stands. In some areas, the value may rise significantly over the course of a few years, while in other areas it may remain flat. I
3. Sweat equity
The other factor that you should consider is that your sweat equity is likely to add additional value to the property as you maintain and upgrade it. Doing things like repainting the home, adding new siding, refinishing the inside, doing some basic landscaping to the lawn, and so on will add value to the home without significant financial cost.
Not only will this allow you to charge more for rent, it will also increase the value of the property itself should you choose to sell it in the future.
If you enjoy home improvement projects, this should be a major attraction for building a rental property. You’ll have the opportunity to fix it up upon acquisition as well as in between tenants, which will return very nice dividends for you.
There are several disadvantages of building rental houses too……
- Concentration of assets
One drawback to investing in a rental property is that for most people, owning a rental property is a serious concentration of their assets. It would take a significant portion of the average Kenyan’s net worth to fully own a rental property.
The problem with that concentration is that it’s not diversified at all. That investment is in a specific house on a specific block in a specific neighborhood in a specific city. If that neighborhood goes downhill, you lose a lot of money. If that block goes downhill, you lose a lot of money. If something unfortunate happens, you lose a lot of money.
Like it or not, by owning a rental property, you’re tying yourself to the local real estate market in a very tight way. Concentration of assets is not a wise investment strategy. However, the more wealth you have, the less this becomes a factor
2. Tenant risk
Tenants are never a guarantee to pay their rent. Even in the best of times and even with the (seemingly) best tenants, that revenue stream is far from guaranteed.
Sure, sometimes you’ll get a great tenant that pays their rent on time for years and years and years, but that’s never a guarantee. Some tenants won’t pay regularly, and others won’t pay at all. You’ll be out several months of rent and also the time spent dealing with their non-payment and eviction.
Some tenants may also cause more property wear than others. Sure, you’ll have that security deposit, but that’s still a cost and a risk.
There’s also the risk of not having a tenant at all, which means that you’ll have periods where the property generates no rental income.
3. Active involvement
Even in the most “hands off” of situations, you’re still going to be devoting notable time to this rental property. Eventually, it will need repair. Eventually, you’ll have to check on it. Eventually, you’ll have to interact with the tenants. Eventually, you’ll have to do paperwork of some kind or another.
Rental Houses: Who Would Make a Good Landlord?
As I studied the ins and outs of becoming a landlord, it began to occur to me that some people are personally predisposed to be more likely to effectively manage – and enjoy the management of – a rental property, while others are not so predisposed. Here are a few traits that a good rental property owner might find desirable. The more of these traits you have, the more enjoyable and lucrative owning a rental property may be for you.
You enjoy small home improvement projects. Do you enjoy doing things like painting, fixing things etc? Some people really enjoy these tasks, particularly when doing so rewards their sweat equity with more rental income and a higher property value. Other people don’t enjoy home improvement tasks much at all, which will make this part of the gig into painful drudgery.
You have spare time.
If you’re on a tight schedule, it might be very tough. Even if you hire a manager/caretaker, owning a rental property will still eat up at least a little of your spare time. If you choose to go without one, it can eat up a lot of time.
You don’t mind occasionally dealing with difficult situations with people.
Being a landlord sometimes means dealing with tenants with overinflated demands and expectations. It can also mean dealing with tenants who don’t pay their rent. Those types of interactions can be difficult and, if handled poorly, they can escalate into progressively worse problems. Are you willing to occasionally deal with these kinds of difficulties?
You have significant liquid assets to invest right now.
It’s generally a poor idea to take out a loan in order to build a rental property because of the financial risk it introduces into your life. If you don’t have the financial wherewithal to build a rental property – or you don’t have an established business that can handle this via a business loan – you shouldn’t be in the rental property business yet.
Investing in a rental property won’t absorb the majority of your net worth.
This is all about concentrating risk and putting all of your financial eggs in one basket, which is never a good idea. If you’re going to have the majority of your net worth tied up in a rental property, you may want to reconsider your plans.
For some people, owning a rental property might be a brilliant personal financial move. If they’re in good financial shape already, have some spare time on their hands, and don’t mind handling home maintenance emergencies, a person who puts in some patient time finding the right property to rent can make a very nice profit on a rental property.
However, not everyone is in that group. Some people might not relish the interaction between tenant and landlord from the landlord’s side. Others may not be in a financial position to take on a rental property quite yet. Still, others might not feel confident in their local real estate market.
The important thing to remember is that investing in rental properties is definitely one of many options on the table, and it is a good option for some people. Take into consideration your own financial state, your personal strengths, and your interests and make up your own mind about whether rental property ownership is the right move for you.