The Pros and Cons of Residential Rentals

Rental properties are a reliable source of income for many investors. A rental property is a business, and good business people know what it takes to keep a property maintained and tenants happy. On the flip side, rental properties can quickly become money pits if owners get into the landlord business without first doing their homework. 

Our last article talked about the differences between commercial and residential real estate. This week, we’re going more in-depth to discuss the pros and cons of residential rental properties. 

The Pros of Residential Rentals

Residential rental properties — those that house individuals, couples, or families — have several benefits.

Constant demand. People have to live somewhere. If they can’t afford or aren’t ready to buy a home yet, they often look for a place to rent. This constant demand keeps residential rental properties circulating in the market, offering shelter for tenants while also supporting a large pool of buyers and sellers.

Easy to attain. There’s a relatively low barrier to entry for residential real estate. Even if a buyer’s budget is limited, there are still numerous properties that might work as rental investments. Lucrative properties are everywhere, from the smallest town to the largest city. Anyone can buy a house, providing they qualify for a loan.

Easier to finance. Residential rentals are generally easier to finance than commercial properties. Serious real estate investors should have no problem qualifying for a loan for a residential rental property, assuming their credit is good. Many mortgage options are available, and lenders are often willing to work with buyers to get them the best rate and term possible.

Short-term leases. Many residential rentals are leased one year at a time. This shorter rental period allows the landlord to adjust the lease price if needed to keep up with inflation or unexpected rental costs. Cash flow is easier to manage if prices can be modified frequently.

The Cons of Residential Rentals

Here are a few of the drawbacks to becoming a residential landlord.

Demanding tenants. Residential landlords are responsible for maintaining the property in good condition. Although the work involved in doing this is usually pretty minimal, there are times when it feels like it’s out of control. Frequent calls from tenants — especially high-maintenance tenants — take away from other activities and can also be a mental and financial drain. Make sure the rental contract is clear on who’s responsible for what before the tenant moves in. This reduces stress in the long run.

Eviction challenges. Many states have made it increasingly difficult to evict tenants from a residential property. Federal, state, and local fair housing and landlord-tenant laws often favor the tenant, regardless of their egregious behavior. Trying to evict a tenant can take months, even if they’re months behind on rent. Rigorous tenant screening at the outset can help prevent eviction later.

Ready to Dive into the Residential Real Estate Market?

Before you take the plunge, know this: Many aspects of investing in residential rental properties can impact you at tax time. The experts at Adams Accounting Solutions have years of experience dealing with the tax implications and requirements of residential rental properties. We can help you plan for these impacts so that you’re adequately prepared at tax time.

If you’re considering the purchase of a residential rental property, give Adams Accounting Solutions a call first. We’ll make sure you go into the transaction with your eyes open.