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?
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!
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.
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