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The Pros And Cons of Building New Rental Property

Construction of a new rental property is an exciting prospect for the many parties involved: owners, contractors, subcontractors, utility companies, waste managing companies, bankers, and of course, the prospective tenants, too.  But, after it’s built, the reality of owning a new rental property hits the owners square in the face, not only with some of their favorite sweet pie, but also some quite bitter offerings.  This article presents some of the pros and cons of a rental property.

Advantages to Owning New Rental Property

  1. An obvious advantage is the condition of the property.  Everything’s new and looking great, so tenants are not hard to find.  They’re willing to pay higher rent to live in a fresh, new place without cockroaches and plumbing issues.
  2. Hopefully, the rental income will exceed the mortgage payment, giving the owners positive cash flow each month.  These profits make rental properties attractive investments.
  3. If the owners are handymen, they can participate in some aspects of the construction, thereby saving money by not paying subcontractors to do everything.  It’s called sweat equity, and it is a powerful way to set yourself up for positive cash flow equity for resale in the future.
  4. Over time, whether one year or 25, the property will likely appreciate in value, thus, giving the owner the opportunity to sell at a profit.

Disadvantages to Owning New Rental Property

  1. Even if you hire a property management company to maintain your property and collect rent payments, the time will come to handle some kind of issue with tenants.  A best-case scenario would be a question from the tenant, which is relayed to the owner and easily addressed. A worst-case scenario is when the tenants refuse or are not able to pay rent; so when eviction warnings and proceedings commence, the tenants get vengeful and trash the place, sometimes even stealing furnishings.  It’s not uncommon for a landlord to lament that after finally getting the tenants out, he had to repair holes in the walls, paint over the badly stained and smudged walls, replace pet-stained and torn-up carpets, unclog drains, replace broken faucets, and get the unsightly stench out of the never-cleaned bathrooms. This speaks to the difficulty in choosing good tenants.  It’s hard to know, though checking references and credit are very helpful.
  2. Expenses of owning new rental property can rise each year, namely property taxes, insurance, and HOA fees.  Sometimes it’s prudent to raise rent a little to compensate for the additional expenses.  Be aware that raising rent may cause even your best tenants to move out, so do your best to keep rent at fair market value.
  3. If owning a new rental property is your only investment outside bank savings accounts, your portfolio is too narrow and subject to great losses.  Your investment portfolio should be diverse, not only in real estate, but also in some stocks, bonds, and especially mutual funds.
  4. Seasonal vacancies can really hurt.  Do your due diligence on how other rental properties in your city handle the times of high vacancies, and plan accordingly.  Keeping the place rented is paramount to reaping a positive cash flow.

Sometimes having a compiled list can really help get a good perspective on things. Hopefully this list of pros and cons of a rental property can help you feel more prepared as you dive into your project.

Article By: Clear Content Marketing