Owning a property portfolio is something that is aspirational for a lot of people. But it can also have a massive impact on your finances, good and bad.
The aim of this post is to outline the potential benefits and risks so you know what you're getting yourself into if you go down this route. By the end, you should have a much better understanding of where you stand.
The Benefits
So, what are the benefits of owning a property portfolio?
Appreciation
One of the biggest benefits is the appreciation that occurs. Most property prices in most parts of the world rise over time, returning multiple percent long-term depending on the location.
For example, many homeowners in the U.S. have seen their properties rise in value by perhaps 5 to 6% on average over recent decades. This situation also may continue as long as there is pressure on housing.
Leverage
Another benefit of a property portfolio is leverage. You can own much more than you could pay for with your existing capital.
Tax Advantages
The tax advantages of owning property are also considerable. For example, you can make various tax dedications, like mortgage interest and property taxes, reducing your taxable income substantially if you want.
Rental Income
Lastly, you can earn rental income from properties. This continues to pay you as long as you own the property and acts a bit like dividends.
Risks And Other Problems
Of course, owning a property portfolio is not without risks. Learning these is critical.
Market Risk
The top concern for many investors is the market risk. Figuring out what’s going to happen next and how much house prices could fall is essential.
This is why it is so critical to get help with property sales and purchases. Often, professionals have deep insights that you don’t because of the data they have at their fingertips and their deep experience.
Liquidity Issues
You can also run into liquidity issues if you have a portfolio of properties. These occur when you can’t sell a property to meet your immediate financial requirements.
Liquidity issues come up more than you might think. They can be extremely damaging in some situations, preventing you from running your business and, in extreme cases, forcing a firesale.
Management Costs
The management costs involved in owning a property portfolio can also be substantial. Many of these firms will cream quite a lot off the top, reducing yields substantially.
Management costs are often on the order of 8% to 12% of the rental, which is quite a lot. What that means is that overall profits will be lower, and the actual benefits of renting out the property are minimal.
Interest Rate Risk
Then, there is the interest rate risk. If you’re borrowing a lot of money and interest rates go up, you suddenly have to pay a lot more, and the rental income you’re getting might not cover it. Situations like these can lead to bankruptcy quickly, which is why it is critical to manage leverage well.
Comments
Post a Comment