Are You Ready to Be a Landlord?

by Krantcents · 52 comments

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Are You Ready to Be a Landlord? Interest rates are the lowest in more than sixty (60) years.  Housing prices are the lowest we have seen in many years.  Foreclosures are still happening daily.  Is this the right time to buy real estate?

Fool’s Gold?

Doesn’t everyone want to make a fortune in real estate?  Don’t you want to take advantage of perhaps a once in a lifetime opportunity?  Is it Fool’s Gold or a real opportunity?  Are you just running away from a volatile stock market?  I think you need to know a little bit more about real estate.  Real estate is not like stocks; it takes time to sell and is just as susceptible to market conditions as stocks.  Being a landlord is not a cash machine!

Risky Business

Owning rental property looks like a great deal.  You buy a property and a get a mortgage.  The tenants pay your mortgage and you make a profit.  In a perfect world it is really that easy, but we do not live in a perfect world.  In this economy, many good tenants can lose their job and are unable to pay their rent.  How do you pay your mortgage, if one of your tenants does not pay their rent?  What if the tenant moves and you cannot rent the vacancy for a month or two?

Rental property have turnover!  It is normal for people to move and that means you spend money to fix up the unit.  I wrote how to avoid problem tenants as a guide for landlords.  These are costs you must incur before you can rent the unit.  These expenses range from painting the unit to replacing carpeting and/or drapes and possibly appliances.  You can also incur other expenses such as a leaky roof, faulty water heater or other repairs/replacements.  You can set up a reserve for all these expenses and replacements, but there is no way to predict when they will occur.  It may coincide with vacancies.

The economy can affect your property.  More tenants may have difficulty paying the rent.  You cannot raise the rent although your expenses are rising.  The cost of oil and transportation affects all industries and your expenses will increase.  The bad news is you have to suck it up for a while.  It is far worse to lose a paying tenant over $20 per month than for you have a decrease in profit.  Capital expenditures such as replacement of a roof, water heater or a major repair must be done.  Deferring it may also lose a tenant!

The Rich get Richer

After the first few years, you built up reserves and profits.  The tenants help you pay down the mortgage and you are ready to expand.  You know, buy the next property or not!  You bought well and you could just sit on your profits and wait until the mortgage is paid off and cash out.  Another scenario may be refinancing the house or building and investing in another property.  Some people live off the income of the property and enjoy the increasing profits.  For example, you bought a property for $200K and twenty (20) years later, it is worth a million dollars.  The choices are unlimited.

As you can see there are a lot of choices!  You can increase the rents annually or not.  I think landlords should increase rents routinely to stay with the market.  You may choose to maintain rents slightly below market to rent units quickly.  Last you may choose to increase your rents when there are vacancies only.  Remember, real estate is not sold quickly.  If market conditions change you may lose money.  Rental property is a business and you must take it seriously.

Final Thoughts

Now, is a great time to buy real estate!  It may be the opportunity of a lifetime, but there are risks.  Some of the risks are within your control such as selection of the property and tenants and others are determined by market conditions.  Perhaps start small with your first home or condo and see if you like it.  Rental property is no different than any other business; it requires skills and talent to handle the issues that come up.  I only touched on some of the difficulties of owning income property, there are many more risks with delinquencies and repairs/replacements.   Are You Ready to Be a Landlord?

Photo by: Diana Parkhouse

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{ 47 comments }

Roshawn Watson November 30, 2011 at 1:55 pm

Now is a great time to purchase property and consider being a landlord. Too often we don’t highlight the risks or the process. The bottom line is that if done correctly over time, being a landlord can be a very solid way to build wealth.

krantcents November 30, 2011 at 2:42 pm

Absolutely, but it is not easy! You need to go into it with your eyes open.

Miss T November 30, 2011 at 5:16 pm

Real estate is one of the things I have been bringing up with my husband lately as an investment. It is definitely something we are considering. We just need a bit more time to get the funds in place. I hoping to own a few properties down the road. 

krantcents December 1, 2011 at 12:01 am

Timing is everything! Make sure you are receiving value otherwise it is not worth it.

Money Beagle November 30, 2011 at 5:21 pm

I’ve thought about it but have never been that willing to take on the risk.  Having my own place, which I know we keep up and maintain well, still requires a lot of time and money to fix.  Having another place with people who aren’t going to care about it will require a heck of a lot more money (and time, depending on how much I would do myself) to fix and keep up.  The initial outlay might be a steal these days, but the ongoing costs and effort make it a no-thanks for me!

krantcents December 1, 2011 at 12:02 am

Rental property is not an easy road to riches, but it does work.

Hunter November 30, 2011 at 5:27 pm

I’ll be a landlord in 7 months. It’s a little stressful going into new territory but I’m looking forward to learning the process.

krantcents December 1, 2011 at 12:03 am

Find a good real estate broker who is willing to teach you some of the basics. Good luck.

Kris @ Everyday Tips November 30, 2011 at 7:38 pm

My brother was in town over the holiday and he owns 12 rental properties all over the country.  He actually hires a property manager in whichever city he buys in and they handle all the leasing and repairs.  It has worked out amazing for him.  I am considering buying something in the next year, but need to take care of some things for the house first.

krantcents December 1, 2011 at 12:04 am

Personally, I like buying locally so I can check up on it.

John@moneyprinciple November 30, 2011 at 10:39 pm

There is another side to this question.  We have wondered whether to sell our house and rent.  The rent may be a bit more than a mortgage but we would have a large stash from the equity.  This was prompted by our neighbours who actually live in Australia but rent our their large house here.  The tenants rightfully say that they couldn’t afford to buy it but it is a really nice area (not just because we live here).

So if it’s a good deal for us, it is probably a poor deal for the landlord.

On the other hand, UK rents are rising as more people are doing this but there is not enough rental property around.

As you say there are a lot of costs and you need to be in it for the longer term.

krantcents December 1, 2011 at 12:08 am

If property values are increasing, why would you want to sell your home? Do you have an alternative investment? Something to think about!

World of Finance December 1, 2011 at 1:10 am

First time around, there tend to be many surprises that people aren’t always prepared for.  Nice overview. :)

krantcents December 1, 2011 at 1:18 am

Thanks, rental property looks easy, but it isn’t.

One Cent At A Time December 1, 2011 at 3:51 am

Not yet there. But this is good time. I am renting now and first will buy home for us before investing in rental property. Partly this has to do with me being in this country for only last 6 years.

krantcents December 1, 2011 at 2:27 pm

It may be an opportunity, but not for everybody. Just buying a house is a big decision.

Cash Flow Mantra December 1, 2011 at 4:54 am

I would love to be able to purchase more property at this time, but I have kids entering college that I am focusing on first.  I still think prices will take a while to increase so I do have some time.

krantcents December 1, 2011 at 2:29 pm

Prices and interest rates will be low for the next year. It could be longer because of the absorption of foreclosure property.

101 Centavos December 1, 2011 at 5:12 am

This is a topic we’ve been tossing around for a while. I’m willing to consider it, Mrs. 101 is dead set against it…. for now. I’m working on it.

krantcents December 1, 2011 at 2:33 pm

I think you want your wife’s support in the decision.Rental property is hardly a passive investment.

YFS December 1, 2011 at 5:55 am

As a person who is about to buy his 3rd rental property I cannot agree more with the “it’s the right time to buy”.  I feel that it is always a good time to buy.  If you purchase your property according to what you can realistically get for rent.  I buy on income alone and never appreciation.  Also a property manager is worth their weight in gold if you get a competent one

krantcents December 1, 2011 at 2:35 pm

Rental property is like any other investment. You need to do your research and buy at the right price. A good manager is worth a lot, but monitor what they do too.

retirebyforty December 1, 2011 at 10:18 pm

The 4 plex we invested in are taking a while to turn positive. I set 5,000 aside for repair and that’s about gone. I think most of the repairs are done now though and I can only hope we turn positive in December.

krantcents December 2, 2011 at 12:21 am

Hope does not work! Ask for advice from your management company for advice. Ask them to provide you some statistics of other 4plexes they manage. Are your rents in line? Are your expenses in line? What can you do to either increase income or reduce expenses? Good luck.

retirebyforty December 2, 2011 at 5:08 pm

Thanks for your advice, I’ll talk to the management company. The rents  increased with the new tenants, but there were a lot of deferred maintenance/repairs from the previous owner. I posted an update on my site today.

krantcents December 3, 2011 at 12:13 am

Surprises like this are not unexpected particularly because it was a foreclosure. Get involved and assess the management company’s.role in screening the tenants. The monthly management fee is in line with what I know about fees. Reduce expenses where you can and do a market survey about rents or have the management company give you a survey.

NetWorthProtect.com December 2, 2011 at 12:49 am

I agree with your assessment, I think it is a great time to buy as well.  For example, in New York City (which I concede is not the easier place to buy) rents are going up will home prices have been going down or at least staying flat, same thing in NJ.  So, I hope to buy property and rent it out. Sure there is risk, but for me I can always just move in to my investment property if I can’t find a renter.  It’s a pretty good deal.  The only issue I see is maintenance, I have to find a place that does not need any work.  I would hate to jump into a money pit!
http://www.networthprotect.com

krantcents December 2, 2011 at 1:08 am

There are risks in every investment, rental property just have more risks. If you buy the wrong place, you can sell easily.

krantcents December 7, 2011 at 6:41 am

Finding the right property is difficult in any economy.

UltimateSmartMoney December 2, 2011 at 2:01 am

I highly recommend it if you can afford to buy a property.  Not only do you get rental income, the property can be used as an investment opportunity.

krantcents December 2, 2011 at 4:06 am

It can be the start of a mini empire! Remember, it is risk free.

My University Money December 2, 2011 at 2:42 am

I think you’re probably right about this being a great time to become a landlord (especially in the USA).  Another factor in your favour is that many people will now be shy about owning their own homes due to the recent mortgage crisis.  Personally, being a landlord is just way too much of a headache for me.  I would rather invest in REITs for my exposure to real estate.  They give great distributions, and are a much more diversified option as opposed to placing all my eggs in one or two rental properties.

krantcents December 2, 2011 at 4:08 am

Certainly less risk, but also less reward! Everyone should invest in opportunities they feel comfortable with.

Untemplater December 2, 2011 at 8:15 am

I’ve done some property management work on the side and just don’t have the desire to be a landlord.  Home improvements and fixing things really stresses me out for some reason.  It is a good time to buy though with rates so low!

krantcents December 2, 2011 at 2:36 pm

Home prices are very attractive right now and the rates are just another plus. Rental property is not for everyone.

Jerry December 2, 2011 at 2:21 pm

I agree that people should buy.  If you can afford it and can rent it out, why not?  People need a place to live and it could lead to making a nice side income.  We rent our home out and it covers our mortgage, taxes and insurance and that’s enough for now.  We’re happy with it.

krantcents December 3, 2011 at 12:17 am

I agree and I did it when I downsized. The current housing situation may be a once in a lifetime opportunity or a very risky time in history. There are still alot of foreclosures which will depress home values for a while.

Way Rich December 3, 2011 at 7:28 pm

We be came landlords by default.  The process began about one year ago, we found a house closer to our kids.  But we were upside down in our old house due to refinancing.  When the new housed closed and we moved, a family that is known to us ( our kids grew up together) needed to move into the school district that our house was located in.  They have paid rent on time and as of this posting, are very low maintenance. 

krantcents December 3, 2011 at 8:14 pm

I am glad it is working out for you. It may make you comfortable enough to do it again.

Shaun @ Money Cactus December 4, 2011 at 11:37 am

Investing in property can be a headache at times, but there are a lot of benefits too.  I’ve ended up with significant equity in a couple of properties over the last 6 years so the little bumps along the way have been worth it.  As you say, there are a lot of ways to approach it, my strategy is buy, hold and don’t sell.  So far it is working just fine!

krantcents December 4, 2011 at 5:22 pm

Multiple strategies work very well with real estate because it can satisfy a multiple of objectives.

Darwin's Money December 4, 2011 at 11:19 pm

I am glad I became a landlord, but holy crap do ex and current landlords have tons of horror stories!  I’m encountering my own mini-drama now; it’s stuff you’d never even imagine that bites you in the butt!  Oh well, it SHOULD pay off quite well over the next several years; time will tell!

krantcents December 5, 2011 at 12:05 am

Income property has its problems! Some of which is not controllable, but over time can be very lucrative. Along the way, there are ups and downs.

Timothy Artisan December 11, 2011 at 9:00 pm

It is something that I’m considering, and will consider in the future. I have one friend that owns 5 properties and she can’t wait to get out, then I know 2 gentlemen who own 1 property each and can’t wait to buy more.

The woman I know has had a rash of problem tenants, and 4 A/C unit replacements out of the 5 units. One of her tenants had a toilet leak (on the 2nd floor), but went on vacation for a week and forgot to tell her about it. Once they got back, there was a ton of water damage. to the 1st floor ceiling.

The guys haven’t had a horrible time other than late payments and things like that, but nothing too detrimental. I have to say, while it does sound aggravating, it hasn’t discouraged me yet. :)

Thanks for your thoughts on this subject as it is an idea that I entertain from time-to-time. I definitely think now is a good time to consider it if you are financially stable enough to handle bad tenants and vacancies.

krantcents December 11, 2011 at 9:07 pm

Being a landlord is not for everyone, but it is a great way to put your money to work for you. The current real estate situation with interest rates low is a real opportunity. There are risks though and it is not a get rich quick scheme.

Timothy Artisan December 11, 2011 at 9:31 pm

You mean I won’t be able to purchase a property for less than $100 dollars, find a renter and make millions as I sleep? There was a guy on television that said I could. I’ll wait until I get his system in the mail before I pass judgement :-P .

In all seriousness though, I listen very closely to what my friends are saying when they talk about the ups and downs they experience. I’m sometimes amazed at the stories I hear, LOL.

krantcents December 12, 2011 at 12:02 am

There are some real nightmares with rental property, but thankfully not too many. If you put in the work or effort you can avoid 95% of it. You can always have reserves for the 5% you can not predict or avoid.

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