Owning a rental property can seem like a dream investment. After all, you can put down a small amount of money and get a low-interest mortgage to cover the rest of the property's cost, and your tenant's rent will ideally cover your mortgage payments and hopefully provide extra income as an added bonus.
Rental properties can actually give you a steady stream of income and the ability to earn a generous return if the property appreciates in value and you can sell it for more than you paid for it. But while this may seem like an ideal way to invest in real estate, there are actually some huge downsides that could turn your purchase of a rental property into a nightmare. Here's what they are.
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You could have problem tenants
One of the biggest risks of owning a rental property is that your tenants could turn out to be disasters. Those who rent your space can cause problems in a huge number of ways, from not paying rent to doing serious damage to your property. And if you need to evict them, it can take months and a lot of legal expenses to get your rental back into your hands.
Fortunately, there are ways to minimize this risk, including requiring references and checking your tenants' credit. This doesn't guarantee you'll have a positive experience, but it does reduce the chances of something going very wrong.
Your property could remain vacant
If you can't rent your property out, you'll have to pay the mortgage, property taxes, and other carrying costs without any income coming in.
You can reduce the likelihood of your property remaining vacant for long stretches by doing careful research into occupancy rates and market rents before buying. But of course, things can change over time and make your property less desirable, so there's no foolproof way to ensure that you'll actually make money on an ongoing basis with your rental.
You could end up with expensive repair costs
Finally, if big issues arise at your property, you could end up having to deal with the hassle of arranging repairs and the expenses associated with them. In some cases, making fixes could end up costing tens of thousands of dollars, and could seriously eat into your profits -- or even result in losses.
Now, there are ways to reduce the chances of unexpected and costly repair bills. You'll want to get a detailed inspection before buying a property, and should make sure to keep up with routine maintenance tasks so small problems don't become major issues. You can also set aside a portion of your rental income in a special repair account so you have the money you need when something does go wrong.
So is owning rental properties really likely to turn into a nightmare?
While there are definite risks of owning a rental property, the reality is that every investment you make requires you to accept the possibility of loss. The key is to take steps to try to minimize the dangers, and there are ways to do that when investing in real estate.
If you do your research and make smart choices with regards to which rental property you buy, hopefully you'll end up very happy with the decision to own one as part your investment portfolio.
