Pros and Cons of Long-Term Rentals

There are many ways to build wealth throughout a lifetime, but for us, we love building wealth through real estate, and for good reason.

Real estate has proven to be an incredible way to invest and grow both over the short and long term. In fact, in our experience, the returns one might expect in real estate can far surpass that of the stock market and we’re all for it. Real estate also offers various ways to invest, from property flips to short term rentals to more passive ways like REITs. And so we’ve also found that with an ever changing real estate market, there is always a vehicle that seems to make sense and that can offer diversification. That all being the case, in this post, we’ll highlight the various pros and cons that exist with long-term rentals, and show you how to determine if it makes sense for your situation. And in our next post, we’ll also explore how to analyze potential deals and give you the equations that you’ll need to understand the ins and outs this type of an investment. No matter if you are just starting on the path of investment or have a few under you already, we’ll show you how to simplify the often complex world of real estate wealth building.

First off, let’s start with what constitutes a long-term rental:

Purchasing a property to rent out on a long-term basis. Can be residential or commercial properties. Long-term is anything over 6 months.

Pros

Stable income: In our opinion the top advantage, is the stability in income. Though we do love our short-term rentals, the market can be fickle, and so with fluctuations in occupancy comes a roller coaster ride of revenues. That’s why it’s nice to diversify and have some LTRs to add balance and predictable cash flow in the mix.

One Tenant: Most of the time having just one tenant to communicate with is a blessing, and can mean both a simplification of communications and a greater commitment in keeping your property clean and in good shape. Now that being said, talk to any LTR investor out there and they are sure to have had their fair share of horrible tenants, and you could be with them for not nights but months.

Tax Advantages: There are quite a few tax benefits that come with owning long-term rentals. Not only are there deductions for mortgage interest, property taxes, depreciation, and operating expenses, which serve to reduce taxable income and overall tax liability, but there might be an opportunity for other incentives. As is always our advice, please check with your accounting team to determine what this looks like for your individual scenario.

Equity & Appreciation: You’ve heard us say it and we’ll say it again, investments are typically either a cash flow or appreciation bet, and likely LTRs will fall into the latter scenario. This being said, to have your equity build at the cost of someone footing your bills is a golden scenario and if you can couple that with an appreciation on the property’s value you are set. Not only will you have set yourself up to hedge against inflation, but you’ll be geared up for a cash out in the form of a BRRRR at some point if you are lucky.

Cons:

Liquidity: Long-term rentals by their nature tend to be fairly illiquid due to the fact that you will be holding onto this investment over not only the course of tenant’s leases, but also in some cases until you see the necessary appreciation to make your return.

Vacancy: One of the dreaded scenarios for any LTR investor is vacancies. This being said, you must prepare by having a cash reserve to cover payments for mortgage, taxes, and the such in the event you find yourself without the next tenant. We would recommend having no less than a year on hand for this purpose to play it safe.

Tenant Management: Tenants can be time consuming and difficult. Investors must handle tasks such as tenant screening, lease agreements, rent collection, maintenance and repairs, and this can be a big pain. Now, we might recommend hiring a property management company who can alleviate some of these burdens, but it comes with additional costs that can eat into rental income.

Legal Headaches: There are many regulations and laws that govern long-term rentals, and navigating them can be a real pain. All LTRs are subject to regulatory and legal risks, including landlord-tenant laws, zoning regulations, and housing codes. Violating these laws and regulations can result in fines, lawsuits, or even eviction proceedings, leading to financial losses and reputational damage. Staying informed about local regulations, maintaining proper documentation, and seeking legal counsel when necessary can help mitigate these risks. That being said, this can cost quite a bit of your time and money, but better to be safe than sorry.

Ready to take the leap? Join us next time to find out how to analyze potential properties and determine whether or not they might make a good fit for a long-term rental. In the meantime, we do love investing in long-term rental properties because of the wide range of benefits they afford. And we do believe that by weighing the pros and cons and conducting a thorough due diligence you can make an informed decision and navigate the complexities that exist successfully.

Want to explore options in the Charleston market? Give us a call, we’d be happy to help on your investing journey.