Sounds like a game show title, we know, but becoming a landlord is actually serious business. It also has serious upside potential—if you know what you’re doing.
“One of the biggest shifts in the housing market since the financial crisis has been the growth of the single-family rental market,” said Investopedia. “Single-family rentals are developing faster than any other segment of the housing market, outpacing both single-family home purchases and apartment-style living, according to Washington, D.C.-based think tank Urban Institute. While the number of households in the U.S. continually increases, almost all the housing demand in recent years has been filled by rental units.”
Yes, smart investments can pay off in a steady stream of passive income, and provide a nice chunk of change when you go to sell. But that doesn’t mean you should run and buy a property without learning a thing or two first. Buy wrong or go in unprepared, and you could make a financial mess of things. “Becoming a landlord might sound like an easy way to make money: Buy a property, find tenants and watch the rent checks roll in,” said CBS News. “But it can be a costly undertaking that requires a lot of time and shouldn’t be taken on without consideration and research, said Lucas Hall, a Washington, D.C.-area landlord and founder of Landlordology.com.”
Ask yourself these questions (and answer honestly!) to determine if you’re ready to be a landlord.
Do you have the time?
Being a landlord is a job. A part-time job, hopefully, but a job nonetheless. If you’re already overscheduled, it can be hard to keep up with all the must-do’s. “People need to understand that this is a business, not a hobby,” said East Meadow, New York-based landlord, real estate broker and president of the Landlord Protection Agency, John Nuzzolese, on CBS News. “You need to take it seriously. The people who make it a hobby usually run into problems because it’s not their top priority.”
Keep in mind, also, that being able to landlord effectively means having some flexibility in your schedule. “Most days are more spontaneous than structured,” said The Balance. “It is not the type of life where you get to work at 9am, go to lunch at noon and leave at 5pm. One day you may have one hour of work to do, while the next, you may have fifteen hours of work.” And you can bet that a fair amount of that work is going to happen at 4am when a tenant emergency interrupts your precious sleep.
Do you have the money?
If you’ve made a good investment in your chosen property, the amount of rent you’re collecting each month will exceed your financial obligation. But what if you have a hard time renting a few of the apartments in the building you bought or one of your tenants skips out? Remember that, no matter what’s happening with the property, you’re still responsible for making your payment to the bank. “You will be responsible for meeting your monthly mortgage payment even if the property is vacant or if your tenant has not paid his or her rent,” said Investopedia. “In addition, you may have unexpected expenses related to your tenants, such as legal expenses incurred as a result of a problem tenant.”
Hiring a property management company to do some some of the ongoing work for you will also cost money—count on about 10 percent of the rent each month, and you’ll also have to pay them a finder’s fee for securing new tenants. But many landlords find it’s well worth the money to be able to offset some of the more painful or time-consuming duties involved.
Do you know what the smartest investments are?
Not every property is a winner when it comes to investment potential, and you need to think like an investor to become one. Forbes has some great tips, including:
• Keep your emotions at bay. “Think of it as purely a business investment and logically negotiate to get the best possible price.”
• Research, research, research. “Make sure that the property is situated in a location that will attract the type of clients you hope to sell or rent to, that it will reach to the returns you are expecting and that it will appeal to the market.”
• Get your down payment together. “Unlike the 3% down payment on the house you are currently living in, you are going to require at least 20% down payment for buying your first investment property. This is because mortgage insurance is not applicable for investment properties. Moreover, investment properties require greater down payments than your regular building and have strict approval requirements.”
• Figure out your expenses and profits before you buy. You want to make sure you have a good handle on current funds, cost to purchase and renovate (if needed), operation costs, ongoing expenses, and what you could legitimately list the house for when you decided to sell.
• Don’t overspend on your first investment property. “Even if you are ready to invest up to a million dollars in your first investment property, it is always a good idea to go for properties that lie in the lower- to mid-range price brackets.”
• Go in debt-free. “As a new investor buying their first investment property, you might need to consider the investment loan options — one shouldn’t be carrying debts as their investment portfolio. You must clear all of your debts, student loans, medical bills, etc., before starting out in real estate.”