Money and time
These investments take regular infusions of cash. It may take up to five years before rental property income meets or exceeds landlord expenses.
Money is needed for a down payment. Lenders also consider investment properties, particularly residential, as being riskier and require a higher interest rate and down payment.
Properties typically require renovations or upgrades before rental. Even turnkey properties need emergency repairs and maintenance. Property managers, service people and other professionals may be needed.
There may be rental payment delays or even eviction moratoriums. But landlords still must pay the monthly mortgage, taxes, insurance utility costs and maintenance. They should have emergency cash reserves equal to six months of mortgage and tax payments.
Landlords face premises liability lawsuits if someone falls or suffers other injuries, especially if the landlord did not repair or correct a defective condition. Landlords may also be held liable for harm suffered by crime victims if the property lacked adequate security measures.
Liability insurance is needed to protect properties. Setting up the business as a limited liability corporation also helps protect a landlord’s personal assets.
Tenants who are essential for rental properties may also be their biggest problem. Difficulties may include late rent payments, noise, bad upkeep, disruptive guests and clients and tenant complaints.
Landlords may have to undergo the eviction process. They need to comply with state and local landlord-tenant rules and rent control laws.
Rental properties have tax advantages. Rental property expenses, mortgage interest and depreciation for equipment is deductible.
Landlords can take a loss up to $25,000 per year if they make less than $150,000. Losses may be carried over to future years if the claim is not allowed.
But tax issues may be complex, and it may take years to realize tax benefits. Sale of rental property is subject to depreciation recapture. This reduces some depreciation deductions. Landlords may also be subject to recapture even if there were no depreciation for deductions.
Attorneys can help protect legal and financial interests in these transactions. They may also assist parties in negotiations.