Pros and Cons of buying a revenue property

  • by Lucas Mohammed
  • 5 Months ago
  • Comments Off

Revenue properties can be good additions to investment portfolios and good options for those new to investing. Income properties are one of the few ways to create an impressive Penticton real estate portfolio without an enormous initial outlay of cash. As with any type of investment there are pros and cons that must be considered before taking on the role of landlord.

PROS

Rental Income

If you have purchased a residential rental property at the right price and with a good tenant in place you will have immediate income. The income should cover the monthly mortgage payments. Once the mortgage is satisfied you will see a profit after the monthly operating expenses have been deducted.

Anybody can qualify to get into the rental business. You won’t be disqualified because of your age, gender, race, national origin, or physical disabilities. As long as you have the mental capacity to manage the business and the money to purchase property there is no reason you can’t be a landlord.

Growth in Property Value

Real estate purchased at market or below market rates almost always appreciates over time. Qualifying factors will determine how much your property appreciates and how quickly. You have to maintain the property and purchase properties in stable areas.

If you upgrade the property without upgrading it beyond what is appropriate for the area you should see an increase in the value of the property. Updating appliances and cosmetic repairs make a difference in what an investor will be willing to pay. The more work you do on the property yourself the more profit you will see over time.

Tax Advantages

The IRS allows you to take a number of expenses associated with rental property including:

  • Depreciation
  • Necessary Expenses
  • Improvements

You can legitimately deduct the cost of maintenance, interest on the mortgage, and wear and tear on the property. You can have a positive cash flow after expenses and still claim a net loss for tax purposes. New changes in the tax code have added additional benefits for landlords who own a pass through business.

You can use a 1031 exchange to sell property and purchase another similar property without paying capital gains taxes. Landlords who rent seasonal property can use the property for themselves 2 weeks a year or 10% of the days the property is rented to others and still deduct expenses.

Low Risk

Owning a fixed asset has advantages and disadvantage. Low risk is the advantage. If the stock market crashes, you may not be able to sell your real estate immediately but it will still be there. On the negative side if you need immediate cash you will not be able to get it by selling your rental property. Real estate sales can take months. Stocks and bonds can be sold in a matter of seconds.

CONS

Unsuitable Tenants

No matter how well you qualify tenants you will still get those who never pay their rent on time, are needy, destructive, and argumentative. A lease with specific stipulations addressing issues like pets, tenant Insurance, and maximum occupancy will help. Security and pet deposits are also beneficial.

Neighborhood Decline

Even with due diligence there are no guarantees the neighborhood you buy into will continue to remain stable. In the worst case scenario the area will decline and your property will fail to appreciate in value. You can minimize this possibility by researching local politics.

Upkeep

There is a cost to maintaining rental property. If you’re handy with a hammer and nails you might be able to do the majority of the work yourself. There are going to be times when repairs require the services of a contractor. These are costs you have to factor into your budget to avoid unexpected setbacks.

Increased Taxes, Insurance, and Natural Disasters

You do not have much control over increases in insurance premiums. Changes in the tax code can decrease landlord benefits and increase taxes. Natural disasters like earthquakes, tornadoes, and floods are beyond your control.

Not everybody is cut out to be a landlord. If you are squeamish about raising rents or let tenants slide on rents and upkeep because you have developed close friendships with them revenue properties may not be the best investments for you. They are great opportunities for those who can manage their rental properties as businesses and not as hobbies.

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