People may commonly think that investing only applies to buying and selling stocks and bonds, or these days, getting into cryptocurrencies. Yet a recent study indicates that 29 percent of Americans regard real estate as their top choice for investing money for the long-term. Investors can choose to purchase a property to fix it up and sell it or to use it for short or long-term rentals.
The Pros and Cons of Buying Rental Properties
Investing in real estate offers many benefits but there are pros and cons to buying real estate to use as rental properties.
The pros start with a recurring stream of income. Of course, with a bigger property and more tenants, the potential income stream expands. Second, rental property values generally increase over time so investors will most likely be able to sell an investment property eventually at a much higher price. While market values indeed have ups and downs, history has demonstrated an upward price trend over time. Third, there are some significant tax benefits for owning a rental property. These benefits include deductions for depreciation, insurance, maintenance, and improvements.
The cons include a lack of investment liquidity since the invested capital is tied-up in the property and it takes time to sell a property. Additionally, there can be difficult tenants, neighborhood declines, upkeep challenges, and unexpected changes to the tax code.
There are some important differences between short and long-term rentals.
Short Versus Long-Term Rentals
Short-term rentals are defined as properties that are rented for less than 30 consecutive calendar days. Each of these is typically a vacation or short-term business rental where the home is fully furnished, and tenants do not pay for utilities. Long-term rentals are properties rented to a tenant for a long period of time with leases that are typically a year in length with a fixed monthly rental payment. The tenant is responsible for all furnishings and utility costs.
The pros of long-term rentals are:
First, a more consistent and predictable income stream, assuming the tenants are dependable. And because the property doesn’t wait for possible vacationers to book the property, it will remain occupied for the duration of the rental period. Since tenants pay their utility bills, owners/investors won’t have to worry about covering seasonal fluctuations in utility costs.
Second, there will be lower operating costs. Long-term tenants typically treat a home as their own, so they take care of minor repairs, handle simple yard maintenance, and keep the property clean. That also means less need for expensive hands-on management expenses. There will be fewer inspections, cleaning, and maintenance requests compared to frequently revolving tenants.
Third, because there is less turnover for long-term rentals, property owners will need to spend less time and money to advertise each property.
Fourth, long-term rental properties will be easier to finance compared to short-term rental properties.
Seek Expert Financing Assistance
Contact CapitalAx Commercial Lending, based in Lubbock, TX to get the financing you need to establish and grow your real estate investing business. We offer a wide range of commercial finance programs to help you achieve your goals.