Rental Real Estate: The Disadvantages

Owning rental real estate can have some wonderful financial rewards over the long run, but for every upside there is the downside that must be considered. Below you will find some of the disadvantages to owning rental real estate.

• One of the important disadvantages of owning rental real estate is the liability that comes with it. In having liability there are two things: (1) what you are really on the hook for and what you can do about it like get landlord's insurance, and (2) the stress of knowing that you may or may not be on the hook for something every time the phone rings. Make sure you get professional guidance for your insurance and legal needs as well as make sure that you home is up to speed when it comes to its physical condition.
• Tied closely to property liability (see Landlord Insurance) is the need to have an open relationship with an attorney. Your real estate attorney will help protect you with knowing the ins and outs of the Federal Credit Laws as well as having a good lease. You must have yourself legally protected when you own a rental property because as soon as you start taking money for other people to use your property you have a whole new set of rules to play by.
• Maintenance budget. Do you have a maintenance budget set aside? Chances are, when you financed the home the lender qualified you on having some type of reserve balance set aside for maintenance. There is a method to their madness as you will have to spend money on your rental property to keep it renter ready. Broken pipes, new paint, cracked walls, dirty carpets, holes in walls, ripped up tile flooring, new roofs, replacement furniture and fixtures are all expected to need paid for over the course of time when it comes to owning rental property. So beware and make sure you have the reserves set aside at all times. It is too late to save when you need the money now.
• On the heels of the maintenance reserve is the vacancy reserve. Again, when you were qualified for the mortgage, the lender most likely only qualified you by using 75% of the rental income against your expenses. This reduction is designed to allow for vacancies in your property throughout the year. As a result of this, you should prepare an other reserve account that allows for at least 4-6 months of mortgage payments to make sure you can weather a storm. Some financial advisors will recommend that you have at least a year's worth of reserves to cover your mortgage payments. So the moral of the story - the more money saved in an emergency fund for vacancies and maintenance/repairs the better.

These are some of the hightlights of the disadvantages of owning rental real estate. Above all else - as you decide whether to become a landlord you will need good legal representation and guidance as well as good tax and accounting representation. If you have these items covered - rental property can be a wonderful way to build your net worth and wealth.

Read about Rental Real Estate: The Advantages