Advantage: Passive Income
Imagine that you don't have to work very often, but money still filters into your checking account. Passive income is the royal road to retirement, and the more you create, the sooner you can stop working your day job and start living solely on passive income requiring little attention.
Disadvantage: Unpredictable Effort & Time Costs
While there will be months that you don't have to do any work at all in relation to a rental property, there will be other times when you have devote a great deal of effort and time to it. In particular, finding a new tenant and situating them with a new lease agreement is a lot more work than most people suspect.
Advantage: Asset & Net Worth Growth
Sure, real estate markets (like any markets) fluctuate in value, but the fact is that anywhere with positive population growth will show real estate appreciation over time. Real estate investors and developers stop investing money to create new supply if values stop growing, which ensures appreciation in the long term.
Disadvantage: Unpredictable Costs
Sometimes rental properties need repairs or updates, sometimes tenants stop paying their lease agreement, sometimes tenants simply disappear without a trace. Landlords have to maintain cash on hand to pay for these unexpected costs, which can sometimes be substantial.
Advantage: Diverse Income Sources & Investments
The more diverse your investments (and sources of income), the less risk. If one of your other investments or sources of income evaporates on you, you'll still have the rental properties, and more properties with a lease agreement signed means more buffer against one of the properties causing financial problems.
Disadvantage: Liability
Landlords are common targets for lawsuits, unfortunately. You can take steps to minimize the likelihood of being sued (such as strictly following your state's landlord-tenant laws, using a state-specific lease agreement and required disclosures, etc), and you can take steps to limit your asset exposure for collection (such as setting up legal entities to own property under), but these steps only reduce risk, not remove it. You can obtain a state-specific lease agreement package from either a landlord-tenant or a website like ezLandlordForms.com, and you can speak with an estate-planning attorney about asset protection.
Advantage: Tax Deductions
Most of the expenses associated with owning a rental property are tax deductible, from mortgage interest to property insurance to attorney fees to real estate taxes to repairs to buying a lease agreement. You can also write off "depreciation," or the theoretical loss of value to the property due to tenant wear and tear.
Disadvantage: Terrible Tenants
These are the greatest risk, the greatest cost, and the greatest headache for landlords. Between ruining your rental property, violating the terms of your lease agreement, not paying, suing you, and many other inventive vexations, tenants can make your life hell. You can generally avoid terrible tenants with extensive tenant screening, including pulling credit reports, criminal background checks, and eviction history reports.
When done properly, real estate investing and being a landlord can be an excellent way to create wealth, generate passive income, and retire early. Invest wisely, use a state-specific lease agreement, limit your legal liability as much as possible, and have fun being your own boss!
Kevin Kiene manages a website for landlords that offers customizable, state-specific lease agreement forms, along with a library of real estate investing articles.
Tags: real estate, finance, real estate investing, passive income, lease, rental, tenant, landlord, lease agreement, tenants