Owning rental property for beginners: Pros, cons & tips

At its core, owning rental homes is similar to investing money in other financial accounts: You’re allocating funds to an asset you hope will grow its value over time.

While owning a rental property can be profitable, there are also a number of financial risks. Before you add “landlord” to your resume, it’s important to understand those potential downsides.

We’ll review the benefits of owning rental property, weigh the pros and cons, outline how to get your finances ready and highlight some of the key considerations that property owners should understand before buying.

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• Is it worth buying rental property?
• Pros of owning rental property
• Cons of owning rental property
• Types of rental property
• Costs of owning rental property
• How to buy rental property
• FAQs about owning a rental property

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Is it worth buying rental property?

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Is owning rental property profitable? It can be. There are many benefits of owning rental homes, including the ability to generate money.

Owning rental property also comes with the ability to offer monthly income, as well as some potential tax deductions.

But keep in mind that owning a rental home requires effort and risk on your part. The best way to determine whether buying a rental property is worth it is by weighing the pros and cons.

Pros of owning rental property

Owning rental property comes with many potential benefits. Let’s take a closer look at some of the ways your property can give your wallet a boost.

Monthly income

One of the biggest benefits of owning rental property is providing a potential stream of income each month.

But remember that you’ll first need to use the rent money to pay down the principal on your mortgage as well as any fees, taxes or maintenance costs.

Appreciating home value

Home values often appreciate — or grow — over time. That’s because of a variety of factors, including:

• Improvements and updates
• Location of your home
• Amenities in the surrounding area
• Supply and demand. 

Tax benefits of owning a rental property

As a landlord, certain annual expenses may qualify as tax deductions for rental property, including:

• Mortgage interest
• Property tax
• Operating expenses
• Depreciation
• Repairs

Remember that you have to report any rent payments to the IRS each year.

Cons of owning a rental property

Owning rental property can also take a large level of effort.

One of the disadvantages of investing in rental property is that it requires a much more hands-on approach than traditional investments, which include managing maintenance needs, lining up renters and deftly navigating unforeseen issues.

Property insurance

Any owner of rental property will need to secure homeowner’s insurance, a policy that covers both the property in case of certain events that damage the home. You may also want to consider applying for landlord insurance, which may give you more extensive protection.

This type of coverage may also protect you if your tenant has an accident within the home.

Costs vary depending on certain factors — such as the type of property, its geographic location and the number of tenants and units .

Maintenance costs

As a landlord, be prepared for out-of-pocket maintenance expenses for home repairs and upkeep. For estimating maintenance costs, many landlords use a square-footage model as a general rule of thumb.

In this model, you tally up the total square footage included on your property: individual units, common spaces, etc. You’ll then assume that you’ll spend $1 for every square foot each year in maintenance and repair costs. So if you’re renting out a 1,000 square foot apartment, you can estimate to pay roughly $1,000 on maintenance costs each year.

Vacancies

An extended vacancy is undoubtedly one of the biggest financial risks involved in investing in rental homes since it’s essentially lost money.

If you can’t consistently rent your space, you’re still responsible for paying the property’s expenses — without generating income to offset the cost.

Other risks

Additional risks include delinquent tenants and the threat of larger economic instability. Naturally, real estate is not recession-proof, and a period of weaker economic conditions directly affects the full financial ecosystem.

An economic downturn could lead to fewer tenants with access to disposable income.

Types of rental property

There are several types of residential rental property to consider, and part of investing in real estate includes determining which type of property is right for you.

Here are four types of rental properties to consider.

1. Single-family homes

Single-family homes are a type of property that is detached from neighboring properties. This a very common and popular type of property to own and rent out since there are more than 80 million single-family homes in the U.S.

Pros: This type of property is good to consider if you value space, privacy and parking availability. You only have to manage one tenant as well, rather than multiple if you own apartment buildings.

Cons: With the amount of space available in a single-family home, it may require more maintenance work, such as yard work and extra cleaning responsibilities.

2. Multi-family homes

Multi-family homes are a type of rental property that contains multiple housing units. This includes duplexes and townhomes. They’re designed to house multiple families or households within a single structure. They typically contain two or more separate living units, each with its own kitchen, bathroom and other amenities.

Pros: Multi-family homes can be more cost-effective than single-family homes since the rent can be split between multiple tenants. There also may be more space in these types of homes than in apartments.

Cons: These types of properties can also lack privacy since they share one wall with another unit. They also may have costs such as HOA fees, which cover amenities and maintenance.

3. Apartments

Apartments can either be a single structure with more than one unit or can be a complex that spans multiple buildings. 

Pros: If you own more than one apartment unit, you may be able to generate additional rental income if you rent out to multiple tenants.

Cons: Apartment buildings may need consistent maintenance, which can add up over time. Apartment buildings are subject to various regulations and requirements, such as building codes, zoning laws and tenant-landlord laws, which can be complex and require legal expertise to navigate.

4. Condominiums

A condominium, or condo, is similar to an apartment since they’re part of a larger complex, but different in that it’s considered a single piece of real estate with a specific owner rather than a property manager. Some condos can also have detached units. 

Pros: Condo complexes tend to have amenities, such as pools and tennis courts. 

Cons: Unlike a home, you have no land ownership with a condo — you just share the interest with the other residents of the condo complex. Additionally, you may have to pay a monthly fee for the amenities within the complex.

You may also consider taking on multiple types of properties to diversify your portfolio. Portfolio diversification can help ensure more stability and predictability in your income.

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Costs of owning rental property

The expenses of a rental property can vary depending on factors such as the location, size and type of property. However, some common expenses of owning and maintaining a rental property are:

• Property taxes: The property owner is responsible for paying property taxes on the rental property. The cost depends on the type of property and where you live.
• Mortgage payment: If the property is mortgaged, you’ll have to make monthly payments to the mortgage lender.
• Insurance: Property insurance is necessary to cover any damage to the property or liability claims.
• Utilities: You may be responsible for paying some or all of the utility bills, such as water, gas and electricity.
• Maintenance and repairs: Owning a property means you’re also responsible for maintaining the rental property and making necessary repairs to keep it in good condition.
• Advertising and marketing: You may need to advertise and market the rental property to attract potential tenants.
• Legal fees: As an owner, you may incur legal fees if you need to evict a tenant or deal with any legal disputes.
• HOA fees: If the rental property is part of an HOA, you may be responsible for paying HOA fees.

It’s important for landlords to keep track of all expenses related to their rental property to ensure that they are making a profit and minimizing tax liability.

How to buy rental property

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The process of buying a rental home is not all that different from buying a house as a primary residence, including preparing for buyer expenses, getting mortgage preapproval and saving for your down payment.

One main difference is the research necessary to ensure your investment may be able to provide a profit. Here’s how to set yourself up for success.

1. Calculate potential ROI

Before you start searching for available properties, begin your process by conducting a cost-benefit analysis to understand if investing in real estate is the right fit for you. In outlining costs, be sure to consider maintenance fees, the cost of insurance, property taxes, utilities, property manager compensation and more.

To help gauge whether the rental property could be a wise expenditure, many investors use the 2% rule in real estate.

This basic principle is that if a property can produce monthly rent payments equal to 2% or more of your total investment, it is more likely that the property will both cover your required expenses and produce positive income. In other words, it passes the test.

2. Get your financing in order

It’s important to get your financing together if you want to own a rental property.

Start with the basics

Start by asking a few foundational questions:

• Do you plan to purchase a home with cash, or will you take out a mortgage?
• Have you saved for a down payment, and how much will be required?

Secure a mortgage loan

Unless you’re able to buy with cash, you’ll want to first shop around and compare mortgage rates. Next, work with your preferred mortgage lender to begin the preapproval process, which will determine your homeowner’s budget for purchasing a property.

Make a down payment on rental property

An amount between 15% and 20% down is commonly required for a down payment on investment property, but your credit is an important factor.

3. Choose the right location

The next step is to partner with a real estate agent to help you find the right property to fit your needs. Location will likely factor in heavily. The best location for rental property will ultimately depend on the type of property you take on.

For example, is your rental property a vacation home with a waterfront destination, or is it an apartment building or multifamily home with dozens of tenants?

Proximity to local amenities, waterfront access and walking distance to public transportation are among the many considerations you’ll want to factor in depending on your type of rental property.

4. Understand landlord-tenant law

Landlord-tenant law is a combination of common law and state statutes. As a landlord, you should familiarize yourself with basic tenants’ rights, eviction and security deposit considerations. Be sure to also consult with your legal counsel to draft a lease template for your tenants.

5. Create a property management plan

Next, have a plan in place for how you will manage and care for your real estate investment. Ask yourself these questions:

• How will you address basic property management needs?
• Will you hire a live-in superintendent, a property manager or a management company — or will you handle the maintenance yourself?

Knowing how involved you want to be and whether you have room in your budget to hire someone will determine the plan you choose.

FAQs about owning a rental property

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Next steps: Set yourself up for success

Owning rental property is like investing in many other financial assets: Determining whether it’s the right choice for you is all about weighing the risk against the reward and navigating economic uncertainty, unforeseen issues and inherent risks as they come.

If you’re looking into owning rental property, be sure to check your credit and start building your financial plan step-by-step.

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