Are you thinking about buying a house to use as a rental? You may even be considering living in a duplex and renting out the other half. Investing in real estate and becoming a landlord are two different things. One involves investing money in the right properties or real estate related funds. Being a landlord is a whole other story.
Being a landlord will require finding tenants, screening them and preparing legally compliant leases. It will involved getting and keeping properties up to code. It means being a handyman, psychologist and bill collector. You will need to be prepared for late night calls and midnight move-outs.
About 35% of Americans rent the space they live in. That is over 110,000,000 people. While some, and perhaps even most, may be solid renters who take care of a property well and pay rent on time every time, ask any landlord and they’ll have horror stories to tell. That’s why you should ask yourself these five questions before becoming a landlord.
1. Are You Financed Well Enough?
Your mortgage will only be a small portion of your monthly expenses as a landlord. If your state has codes for rental housing, you may have to make immediate upgrades like handrails and steel entrance doors. There will be insurance and property taxes. You will likely have some utilities and the costs of maintenance and repairs. You will likely incur some costs associated with advertising and screening of applicants. There is the inevitable carpet cleaning a painting that can occur between tenants. In the case of problem tenants the eviction process can cost hundreds of dollars. Then, of course, there is the price of a vacant rental. According to the US Census Bureau, the vacancy rate for rentals in the United States for the 4th quarter of 2015 was seven percent. That means you can count on at least one month a year of zero rental income. In the case of a non-paying tenant and an eviction, it could mean several months. If you don’t have b enough financial resources, your foray into becoming a landlord could be a brief and expensive one.
2. Do You Have Patience?
Patience is a virtue in many ways for a landlord. First and foremost, buying a rental as an investment will take time to pay off. In many cases, rental owners won’t see any cash flow until the property’s mortgage is paid off. That’s why so many buy a rental property as a way to finance their retirement. Unless you are in a position to buy a rental property outright or with a sizeable down payment, there likely won’t be hundreds of dollars a month in cash flow. There are other ways patience can help in being a landlord. Dealing with challenging tenants is one. Waiting for potential tenants to show for a property viewing is another. If you don’t have at least some patience, you may want to choose another route.
3. Are You Handy?
One of the best assets of being a landlord is being able to save on repair costs by performing them yourself. Fixing a faucet, clearing a drain or replacing an electrical socket by yourself can quickly save you hundreds of dollars in repairs. This also keeps you connected with the condition of the property and the ability to take a preventive approach to maintenance. The other plus is it gives you more access to the property to inspect its condition. Of course, you may not be able to get to every repair in a timely fashion or some repairs may be out of your scope of knowledge. This means paying out of your pocket again. There is no question, however, that having handyman skills are valuable as a landlord.
4. Can You Make Tough, Businesslike Decisions?
You’ll really need to give this question some serious thought. Evicting someone who is late with payments every month and doesn’t communicate with you may be easy. But what about the young family with a baby who has paid rent on time for the first 6 months and begins to have problems paying on time. They are first three days late, then five, then ten. At what point can you make a tough decision? Landlords need to be able to make difficult, business-like decisions. That doesn’t mean they can’t be understanding. But you need to remember when you buy a rental property and become a landlord you are setting up a property management business. You simply cannot allow tenants to take advantage of your good nature. It is important to set the right expectations at the signing of the lease and follow-thru.
5. Are you Good at Managing Your Money?
A 2015 survey indicated that about 70% of us are worried about our personal financial situation. That is not hard to understand when you realize 60% of us operate without a monthly budget. That same survey indicated that 21% percent of us are spending more than we were in 2014. If you are worried about your personal finances you may be better served straightening them out before venturing into becoming a landlord. When you own a rental you’ll need a separate budget, separate finances, and separate financial record keeping. These records must be keep up-to-date and monitored closely. If you are not good at managing your personal finances, you likely won’t be any better at managing a rental.
Should these questions discourage you? Not if you gave yourself the right answers! If you are a patient and handy person with enough financial resources, can make business-like decisions and are good at managing your money, becoming a landlord can be a rewarding adventure. Be sure to let your real estate agent know that you are in search of an investment property and they will be better prepared to properly help you reach your goals.
2 Point Highlight
Investing in real estate and becoming a landlord are two different things.
If you are a patient and handy person with enough financial resources, can make business-like decisions and are good at managing your money, becoming a landlord can be a rewarding adventure.
