Many people dream of owning one or more rental properties, while other people have already gone down this path. Either way, there’s one thing that always holds true: buying an investment property is a big undertaking, with plenty of upside potential, as well as downside risks.
One of the primary benefits of buying real estate as an investment is the ability to use the cash flow to build wealth over time. This is the case with the money you generate via rental income, as well as the potential appreciation of the property.
But of course, just like any investment, there are both pros and cons that deserve your full attention.
What’s the Downside?
In addition to the upfront cost and on-going maintenance and upgrades, owning rental property puts you at serious financial risk. That’s especially true if it’s your only source of income.
While investing in rental properties has always been high risk, high reward, this is even more the case for investors today as a result of the COVID-19 pandemic.
The pandemic has put a financial strain on both landlords and tenants, making it a challenge for both parties to live up to the terms and conditions of their lease agreement.
Here are some of the many lessons the COVID-19 has taught us about owning rental property:
1. Things Can Change in an Instant
One day, your tenant is employed and able to pay their rent without second-guessing it. But the next, they’re out of work and wondering where their next paycheck will come from.
The same holds true for you. If another income stream dries up, you may find yourself relying solely on rental income.
The COVID-19 pandemic turned the world upside down, leading to record high unemployment. As a result, many tenants struggled to pay their rent.
2. Flexibility Is a Must
It’s not something you want to do, but there are times when you should be flexible if a tenant is unable to pay their rent. And now is one of those times.
Yes, it may put a strain on your finances for the time being, but flexibility is something that will benefit your tenant. Not to mention the fact that it keeps someone in your property during a time when finding renters is a challenge.
Note: many states are not giving landlords an option regarding evictions. For example, California recently extended its eviction moratorium through June 30, 2021.
3. Rental Property Is a Smart Investment if You’re Smart About It
With so many lending options available, many people find that they can easily invest in real estate should they have the desire. But of course, that doesn’t make it a smart idea for everyone.
In addition to monthly mortgage payments, you’ll have expenses ranging from repairs to taxes to maintenance. And that’s just the start.
If you’re going to purchase a second home—either to rent or even live in yourself—you should be financially comfortable. Also, you shouldn’t put yourself in a situation in which you’re out of luck if your tenant doesn’t pay.
Final Thoughts
In many parts of the world, the real estate investment market is as hot as ever before. But in other parts, investors are taking a step back to ensure that they don’t get in over their heads.
The COVID-19 pandemic has taught us a lot about investing and money in general, and that holds true with the real estate market.
If you’re interested in owning a rental property, consider the pros and cons of purchasing before you sign on the dotted line. This will ensure that you understand what you’re getting into and that you have a contingency financial plan if things take a turn for the worse.
This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.