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9 Pros & 6 Cons of Rental Real Estate Investment: What are the Profit Killers of Real Estate?

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What causes real estate investments to lose money?

I think that rental property is one of the best investment vehicles out there, and along with living debt free, keeping an emergency fund, living on a budget, and building up investment accounts with low cost index funds to partake in compounding interest, rental real estate is part of a balanced portfolio.

Watch my video on Real Estate pros and cons

Remember that when it comes to rental property, nothing’s more important than staying efficient, professional and profitable,

When it comes to buy and hold property, we want to eliminate what I call the 6 core profit killers

But before we dive into the 6 profit killers of owning rental property as an investment, let’s look at the major advantages.

What’s the Best Property Management Software for Landlords with one to twenty five units?

When it comes to the best property management software, I’d highly recommend that you check out ZenLord Pro, which is a free property management web-based tool, allows you to collect rent online, it’s a free account program for landlords, and it has a really powerful vendor network tool for work orders. ZenLord Pro is awesome for property management software, and it’s FREE for Landlords! Another great resource to find the best property management software would be Fit Small Businesses article that deep dives many options: https://fitsmallbusiness.com/best-property-management-software/

9 Pros of Rental Real Estate Investments

The advantages are:

1: Strong Returns

One, that Rental Property can produce strong cashflow compared to other investments like bonds, annuities, dividend stocks or even real estate derivatives like REITS.  The right property, at the right deal, can produce some amazing returns.

2: Low Market Correlation

Second, is that  There tends to be a Low correlation to the stock market and even to rental derivatives like REITS.  Owning the property yourself lowers the correlation to the stock market, which means you have better diversification.

For details on the following Morningstar report on VNQ Vanguard REIT, click here.

Here, you can see that the Vanguard VNQ REIT got hit harder (in the blue) than the organge S&P 500 index. REITS create volatility compared to buy and hold real estate

3: Rentals are Passive Income – No SS or Medicare

The third advantage is that rental income is a Tax advantaged passive income. It’s not subject to self employment taxes, those dreaded social security and medicare taxes.

4: Rentals are Tax-Advantaged with Depreciation

fourth, is that there are Additional tax benefits with depreciation and cost segregation, and now bonus depreciation.

5: Buy with Leverage (borrow with a mortgage)

Fifth is that rental real estate investments have the Ability to use leverage to acquire them.  You don’t have that ability with most investments, particularly if your a regular jack or Jill without a ton of pre existing wealth.

6: Start with Owner Occupying & Use Living Expenses To Invest

sixth is that Owner Occupants, people who live in one side of a rental,  not only get you use leverage to borrow to get the investment vehicle, but they get to  Leverage their Living Expenses to help build up their portfolio.

7: Land and Property are Finite – They Tend to Appreciate

seventh is that land and Property is finite, so there’s a tendency to appreciate in value.  Nobody is printing more land, and property just has a tendency to increase in value, partially because it’s difficult to create.

8: Its a Perfect Work-From-Home Business

Eighth is that It can be a perfect business activity for yourself and your family members, allowing you to have all sorts of tax deductions and write offs as you pursue profits!  

You can leverage bonus depreciation for company trucks, and leverage all the other tax benefits associated with running our own home business…. In fact, you can even hire your kids in the business to help with the property, and then pay them up to the standard deduction and it would be tax free to them!.

9: It’s Great for Estate Planning

And the ninth and last benefit is that it’s a powerful estate planning tool since there’s a step up in basis for inherited property even after it’s been fully depreciated.  In other words, it’s a VERY tax advantaged wealth transfer tool for multigenerational estate planning.

THere’s certainly more advantages than disadvantages, and I’d love to hear more of your favorite benefits of rental real estate down in the comments.

Now here’s a quick reminder, if you’re looking at getting involved in rental real estate, the moment you have a property, I recommend using a free landlord accounting software and payment processing tool like ZenLord Pro or even Cozy, those two tools are free and really powerful, check out the links in the description..

Now after years of research and client testimonials, here’s what we see as the  6 major profit killers in rental real estate.

6 Cons or Profit Killers of Rental Real Estate Investments

1: Vacancies

First off, – Vacancies.  When your properties are empty, it’s not just that you’re suddenly missing returns, it’s that your net profit gets transformed into a sink hole of unprofitability. Vacancies absolutely kill your returns when it comes to rental real estate.  You need to keep your properties filled.

2: Rent Collection Problems

Second, – Rent Collection problems, aka accounts receivable.   If people aren’t paying you, their checks are bouncing, tenants get behind on rent, or if you’re having problems getting payment at all – rent collection problems can hurt your profits. You gotta operate with professionalism and put in best practices and consequences to protect yourself. Go with an electronic payment processor like ZenLord Pro or Cozy….

3: Inefficient Management

3 – Inefficient Management -which is just  Wasting your time. Professionals understand that while there’s certainly value to being able to eliminate costs by Doing things yourself, a businesses primary profit driver is efficiency because it means that more work can get done with less effort.  You won’t be able to grow if you’re not pruning busy work out of your schedule.

4: Legal Risks

4 – Legal Risks – From slips and falls to tenant protections, legal liability as a landlord is a risk.  If you’ve had renters for a couple of years, you know that you’ll inevitably get sued sometime, and you should be very aggressive in your insurance because one missed or uncovered liability can tank a business.

5: Repairs & Maintenance

5 – Repairs, Maintenance and work order systems.  One major drawback with owning rental property is that depending on where your property is at in it’s lifecycle, you could have some impending major repairs on the way.  Besides the costs associated with maintenance and repairs, you need to keep a close eye on the cost of time and overall customer satisfaction when it comes to quickly and efficiently handling requests from your tenants.  Whether it’s a broken light, bathtub or air conditioner, poor management of the work order, vendor invoice and tenant charge back has the potential to mess things up.

6: Taxes

6 – Taxes – Real estate taxes and income taxes are straight line killers of your profits. You’ll want to leverage everything possible to pay only your fair share in taxes, and not a penny more. If that means you’re working to reduce your tax assessment, utilizing the best tax mitigation techniques, hiring your family members, of utilizing depreciation and cost segregations, taxes can kill your profits.

What would you add to this list? Let us know in the comment section, and don’t forget to like this video and subscribe to Feedbackwrench for more entrepreneurship, wealth building and tax mitigating tips in the future.

About Rob Satrom

Entrepreneur, father, personal finance expert, husband, and founder of FeedbackWRENCH.com and Nuance Financial Tax & Accounting. I love helping small businesses

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  1. […] to talk about what is the easiest way to set up automatic billing or electronic payment for your rental real estate. How do you collect rent electronically, whether you have one duplex tenant, or 50, we want to show […]

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