real estate letters

2021-01-31

Reasons Why Rental Properties Are a Bad Investment

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At Phelps LaClair, we design estate plans that protect your assets and investments, provide tax advantages and deal with end-of-life decisions. As a second-generation estate planning law firm, we can tell you that no investment is without risk. Rental properties are no exception. In our previous post, we discussed why rental properties might be a good investment for some people. In this post, we look at why they may not be for everyone.

With rental property investment, there are market variables that can be difficult to predict, as well as cash flow and liquidity issues that may affect your long term investment strategy. Rental properties will also impact your estate planning. Here are some concerns that might make rental properties a bad investment choice for you.

1. Property Value

Economics 101 says the best advice is to buy low and sell high. With fluctuating property values, how can you be certain that what looks like a good deal today will still be good tomorrow? Even though property values have been rising, it pays to remember the housing bubble of 2007-2008. Some experts believe we are in the same situation today due to COVID and political factors. Before leaping in over your head, wisdom dictates that you seek the advice of multiple people who have extensive experience with real estate investment.

2. Cash Flow

Depending on the rental property you buy for investment, you may end up needing to renovate or rehab it before you can offer it for rental. This could mean your mortgage and monthly payments are higher than you anticipate. Research the property thoroughly to discover all the hidden costs before you put your money down.

There will be maintenance and repair costs that are ongoing no matter how sound the property is. And there will be upgrades and renovations that will be needed to keep the rental competitive in a tight market. Are you willing and able to take on the projects yourself, or will you need to hire a contractor and crew? This can significantly impact your cash flow. You will also need to factor in the downtime between tenants—time that will not be generating income.

Property maintenance and upkeep will definitely affect cash flow and could negatively affect your ROI.

3. Liquidity

It is very difficult to predict how long it will take for a property to sell. Much depends on the location, the economy, and the need to recover a certain amount of money. By contrast, other investments such as stocks and bonds are very easy to unload if you need the money quickly. You need to take this into consideration if you are looking at rental property investment.

The Bottom Line

Rental property investments are great for some people. For others, the risks involved are too much for their comfort level and financial situation. You need to thoroughly research the variables to understand whether this kind of investment is right for you.

At Phelps LaClair, our specialty is designing estate plans, including estates with rental property holdings. We work with professional financial advisors who are well versed in all matters of investment. We can recommend associates who can answer your questions. For all of your estate planning needs, call us for a free consultation with no obligation. Are rental properties a good investment? It all depends!

 

 

Images used under creative commons license (Commercial Use) 01/31/21  Photo by Michelle Adams from Burst

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