Renting Out Your Home: The Pros and Cons

When people think of investing, they often picture a suit-wearing, fast-talking professional aggressively yelling on the floor of the New York Stock Exchange. Or maybe their mind goes to a spreadsheet enthusiast buying and selling through online investment platforms. But did you know that real estate is another option to building an investment portfolio?

Investing in real estate, particularly in a strong rental market, can be a great strategy. But like all investments, it comes with its own risks. Before you jump into real estate investing, here are a few things to consider when considering rentals.

Have a good team

You should discuss how involved (or not involved) you plan to be with your rental properties. For those who want to take on landlord duties, you should expect to collect rents, attend to maintenance and repairs, and find new tenants when needed. This can include tracking down tenants who are behind in rent or responding to calls in the middle of the night or on holidays.

If you don’t want to do all of those things, you will need a good property manager on your team. Don’t be afraid to ask for references or recommendations when interviewing potential property managers. A typical fee for these services is 10% of the monthly rent.

Know what your investment is doing

If you are getting into real estate investing, you will need to accurately track your income and expenses just like a small business owner. You may even consider setting up an LLC, a business designation that will protect you personally from any liability associated with your business. You will need to report your earnings to the IRS and pay taxes, which is why keeping accurate books is so important. It also helps you evaluate how well the property is doing in financial terms.

It is also important to have a financial cushion to pay for unforeseen expenses or vacancy. Even if you do not have rent coming in, you will still need to pay the mortgage, utilities, and other upkeep expenses. Make sure that you are prepared for that scenario with additional funds set aside in case you need them.