Rental Properties

FOR MANY ORDINARY Americans, buying properties and renting them out has been a road to financial success. Typically, the strategy is to find places where the rental income can cover the mortgage payments and other ongoing costs. That way, the tenant effectively pays off your loan, plus you also benefit from any price appreciation. As you raise the rent over time, you can get to the point where you aren’t merely covering costs, but pocketing a tidy sum each month.

Sound attractive? Keep three drawbacks in mind. First, your tenants won’t treat the place the way you would. In shopping for rental properties, you might favor homes that are somewhat rundown. That way, it will matter less if the tenants are a little rough on the place.

Second, being a landlord is hard work. You will occasionally have to find new tenants and you will have yet another home to maintain. Even if you don’t do the maintenance yourself, you’ll need to find others to do the work—and that means not only extra costs, but also extra hassles. You could hire a property management firm to handle all these issues, though that might cost you 10% or more of your rental income.

Third, a rental property represents a big undiversified bet. Your tenants may fail to pay the rent, at which point you’ll have no help when it comes to meeting the mortgage and paying other costs. Even if your tenants are well-behaved, they may not stick around for long. That means you may have short periods without any rental income.

Next: Taxes on Home Sales

Previous: Remodeling

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