A lot has been written about real estate lately. The idea of making “passive” income with the help of real estate rentals provides a draw for those who want to improve their cash flow.
Whether you decide to rent your house out instead of sell it, or whether you want to buy an apartment complex and get tenants for the units, it’s important to figure out if you are cut out to be a landlord.
What does it take to be a landlord?
Know what it takes to be a landlord before you get started. One of the reasons that i sold my home in Utah at a loss last year is because I already knew I didn’t want to be a landlord. Some of the things you need to consider as a landlord include:
- Responsibility for maintenance and repairs: You are responsible for making sure that repairs are made on the rental. You might also be responsible for regular maintenance.
- You are on call: As the landlord, you are on call when tenants need something. If the water main breaks in the middle of the night, you need to be ready to take the call — and arrange for the clean up.
- Tenant screening: Don’t forget about tenant screening. If you aren’t careful, you could end up with tenants who trash your property, or who don’t make on-time payments. This creates a situation in which your brilliant plan for cash flow doesn’t work out as well.
- Insurance: You’ll need to make sure that you understand the insurance you need to properly cover the property and take care of other problems.
- Understand city codes and regulations: It’s also important to know about the codes and regulations in your local area. You don’t want to put in a downstairs apartment when the neighborhood is zoned for single-family residences only. You could face a fine.
Another thing to think about is the way taxes are figured. The IRS has guidelines about what is considered rental income, and the types of deductions you can claim when you spend money on your rental business. Being clear about what to expect in terms of taxes is especially important as you decide whether or not to be a landlord.
Could you hire a property management company?
Being a landlord can be a lot of work — especially if you manage everything yourself. From running down references on tenants and making sure the property is in tip-top shape, it takes a lot of work to be a landlord. When you manage your own rental properties, suddenly that “passive” income doesn’t seem so passive after all.
On the other hand, you could also hire a management company to take care of your properties. For a fee, a management company will handle all of those activities that landlords typically have to deal with. A good property management company will screen your tenants, arrange for repairs, make sure the units are cleaned between tenants and collect rent. This can be one way to manage your properties without the need to be hands-on and handle the headaches yourself.
Of course, it will cost you money and cut into your own returns on your properties, but it might be worth it if you can avoid the hassles involved with managing properties.
Risk vs. return
As you decide whether or not you are cut out to be a landlord, you also need to consider the risk you take on vs. the return you can expect to receive. Renting out properties can be one way to ensure that the mortgage on them is paid (by someone else) as you wait for possible appreciation. When the mortgage on a property is paid off, the monthly income from rent payments can add to your regular cash flow.
You do need to be aware of the risks, however. First of all, declining property values can affect your overall investment. On top of that, you could run into problems with tenants, reducing the amount of profit you make. If you can’t keep your units full, you could lose money.
Keeping up the with property can also reduce your returns. Remodeling outdated kitchens, replacing rooftops and paying for regular upkeep will sap some of your profits. Later, if you try to sell, you could have a hard time seeing appreciation if the market isn’t favorable. You need to have the risk tolerance to keep moving forward even when times are tough.
For many landlords, the costs are more than made up for with profits. Many landlords enjoy the process and make good money. Those who don’t enjoy it often find that they can still be profitable even when hiring a property management company.
However, being a landlord isn’t for everyone. You should know what you’re getting into, and what it takes, before you make that decision. Consider the variables, and think about your personality. Once you know where you stand, you can decide if you are truly cut out to be a landlord.