The pros and cons of investment property

One thing I didn’t know about Capistrano Beach until I moved into the neighborhood is that it has a ton of rentals. Almost every street has multi-unit dwellings–duplexes, triplexes, quads. Plus, many people who move out of Capo Beach keep their single family homes as rentals because of the market demand. Let’s face it–people will pay a premium to have the ocean nearby.

In many cases, rent paid can cover the mortgage (and, ideally, property taxes and some other expenses related to the property, like gardening, pool service, etc). But, even if you break even, owning a rental property can still be a great option. After all, there are tax benefits. In the eyes of the IRS, that property is its own little business. Yes, you have to declare the income, obviously, but you can also write off expenses you have on the property. Plus, consider that the property has a good chance of appreciating in value over time. While the market has plateaued a bit, the big picture shows gains. Even if are in the red a bit on a rental property, the long-term appreciation may make it worth hanging onto.

This is a vacation rental available in Capo Beach. Check it out here:

This is a vacation rental available in Capo Beach. Check it out here.

Of course, like most investments, there can be downsides to income properties, too. They are considered “concentrated investments,” meaning you’ve got a lot of eggs in one basket. And they are “illiquid,” meaning you can’t get your money out quickly. On paper, you have this 400K asset, for example, but you can’t access that as real money overnight. And, by owning an income property, you find yourself in a new role–landlord. Dealing with tenants can be a really great experience, or a really tumultuous one. My in-laws always tell the story of the couple who refused to pay rent and, when finally evicted, they squeezed honey all around the borders of the house to draw in ants. It worked. There were lots of ants.

If you’re hesitant about being a landlord, there are property management companies that will oversee your property for you at a cost of about 8% to 10% of the monthly rent. They’ll collect rent checks and field calls about backed up toilets so you don’t have to. Property managers are not only convenient but essential if you live far away from your rental property.

Keep in mind, your property may make a great vacation rental. There are companies that specialize just in vacation rentals and they will be able to tell you how much your home would go for per night (it usually varies depending on season). They will collect a percentage fee to market your home and manage the tenants. Sometimes, you can collect the same cash in one week as you would in a month from a tenant on an annual lease. But, you also run the risk of not having renters for weeks or months at a time, depending on demand in your area.

If you’re considering adding a rental property to your portfolio, these would be my questions for you:

  • Are you okay with tying up your money in that property, possibly for several years, until it appreciates to a certain level?
  • Have you done the math on how much you spend on the property per year (mortgage, property taxes, property insurance, repairs and maintenance) versus how much you can bring in per month?
  • Are you ready for tenants?
  • Do you have an emergency fund when things like water heaters and air conditioners break?
  • Do you want a property manager?
  • Are there vacation rentals in your area, and would that be an option for your home?

Feel free to contact me if you want to discuss rental property opportunities near you!