I had a great conversation today with a young adult about what it takes to be a landlord. Here is what we came up with:
Pros:
- It can be easy money. If you have good tenants, most months you will collect the rent, pay some basic expenses, and that is it. Occasionally, you will have to pay to maintain, repair, or replace something. Every decade or so you will have a capital expense- new roof, new furnace/A/C, etc.
- If you live in one of the units of a multi-family dwelling, your tenants will pay your mortgage and upkeep.
- You are eligible to write off expenses you would not be able to write off as a homeowner or tenant. Things like tools, cleaning supplies, paint, and other items you use to maintain or repair your rental units can be used to reduce the revenue you receive from your rental units. You can also reduce your income by the amount paid for taxes, utilities, interest, and insurance.
- You might be able to purchase more house than you would otherwise be able to. Some lenders will include the potential rent as income when computing your debt-to-income ratio.
- You can use the additional net income to purchase additional rental units. If you mortgaged the first building, instead of paying off the mortgage, you could save the net income until you have enough to use as a down payment on another rental property.
Cons:
- Tenants who are difficult or destructive can make it dreadful. A bad tenant can not only cost you money, but also time, easily costing you more than you ever collected on rent.
- If you cannot do the work yourself you can quickly eliminate profit margins by overpaying someone else to do the work. Make sure you have a trusted team to turn to for things you cannot do yourself.
- You have to have good boundaries. Tenants will walk all over you if you do not have the backbone to draw clear boundaries. It may be uncomfortable at times, but you have to be able to set your foot down when needed.
- You may need to maintain an account with six months of expenses in it. The bank will want to ensure you can pay your bills should you have vacancies or it the tenants do not pay their rent timely (especially in the current environment).
- If your tenants do not pay you could find yourself facing foreclosure. This has been brought to the forefront this year. Some tenants were protected by the eviction moratorium but the owners were not protected from foreclosure when they were unable to pay the mortgage because the rental income was not coming in. Make sure you have a contingency for how to pay if the rental income is disrupted (another excellent reason to have 6-12 months of mortgage, insurance, taxes, utilities, and basic maintenance in a savings or money market account).
Purchasing a rental property can be a great investment for some people, but a nightmare for others. Do your homework,. Ask friends who have had rental properties about their experiences, good and bad. Think about various situations and how you would react. Know the rules and regulations in your area. Have a trustworthy team in place for the things you cannot handle. Have an attorney review your rental agreement.