By Vincent Barbera, CFP®, MSFS
When it comes to wealth-building, everyone wonders if they are making the right decisions. This is especially true with rental property owners. We all know managing rental properties has the potential to be a lucrative wealth-building strategy—but is it the best option for you?
The truth is, it’s not for everybody. To be worth it, the pros need to outweigh the cons. Let’s take a look at some of those pros and cons to help decide whether or not you should keep your rental property.
The Pros Of Rental Properties
When deciding whether or not to continue working with rental properties, you have to decide if they are more hassle than they’re worth. Keep the following pros in mind when making that decision.
Tenants Pay Off Your Mortgage For You
This one seems obvious, but it’s important to think about the implications. It means that rental properties are a long-term gratification investment strategy. You won’t see your big payday until you decide to sell. Are you okay with that?
Income Tax Deductions
Owning a rental property brings along with it some major tax advantages. Some of the many deductions you can make include mortgage interest, asset depreciation, and maintenance and repairs. If you decide to ditch your rental property, know that you’ll be throwing away these tax benefits along with it.
Good For Those Who Can’t Work Normal Jobs
Earning through rental properties allows you to build wealth regardless of your physical condition. With the help of property managers, you can support yourself even if you’re too old or sick to work a typical job. This might not apply to you now, but you never know what the future holds.
Resistant To Economic Crisis
Rental properties are affected by slow economies, but not nearly as much as some other types of investments. That’s because even if the stock market is crashing, people still need a place to live. A rental property can be a great way to buffer your investment portfolio during hard times.
The Cons of Rental Properties
If you’ve been managing your rental property for a while, you’ve probably realized it’s not all daisies and butterflies. Consider the following reasons why rental properties might not be a good fit for you.
Requires A “Landlord Personality”
Some people just aren’t cut out for being a landlord (and that’s okay). A good landlord needs to be assertive enough to confront tenants about respecting their property, paying on time, and raising rents. If these types of conversations make you squeamish, you might want to switch to a wealth-building strategy that is less confrontational.
Lacks Liquidity
Do you need quick access to cash? If so, rental properties might not be for you. Selling a property while it is occupied is complicated and can take several months. Unlike other assets in your portfolio, such as stocks or bonds, you can’t just sell at a moment’s notice.
Requires Time
If you can’t afford to hire a property manager, you need to be available to deal with tenants and repairs. A rental property may not be a good idea for those who live far away or are too busy to take care of issues that come up.
Causes Stress
Managing a rental property is inherently stressful. You have to worry about the economy, potential lawsuits, tenants disrespecting your property, dealing with late rent (and possible evictions), emergency repairs, and more. If you have a pretty calm life, this might not be a problem. But if you’re high-strung and living every day at Stress Level 11, it might be time to let go of that rental property.
The Bottom Line On Rental Properties
As you can see, there’s a lot to consider when deciding if you should keep that rental property. If you do decide it’s for you, remember that it is only one piece of the wealth-building puzzle. You never want to put all your eggs in one basket.
