Today, I have a guest post from Robyn.
Real estate has always been a lucrative industry; nowadays, investment properties are as popular as ever. Who doesn’t love the idea of owning multiple properties and making free money on the one you’re not using? The problem – becoming a landlord. Not everyone wants to be a landlord.
But in reality, you’re not actually making free money as an investment property owner. Whenever you rent out a property to tenants, you take on the responsibility of a landlord. Landlords have their own series of stressful tasks and obligations that might make you think twice about becoming an investment property owner. It is certainly not easy money!
Are you thinking of becoming a landlord? Let’s weigh the pros and cons of becoming a landlord so you can make a better decision.
Pros & Cons of Becoming a Landlord
The most obvious benefit of being a landlord is that you’ll be making extra income. When renting out to tenants, you can use the rent money to pay the monthly mortgage payment, and then you can pocket the rest. It’s a great way to make some extra cash and also to build your wealth.
To make a profit, you must buy a property in which your monthly mortgage payment is going to be less than you can charge for rent—you’ll have to pay close attention to rent prices in the area to know exactly how much you’ll be able to charge. Regardless, when you pay off the mortgage on the property, you’ll be able to pocket all the rent that your tenants pay, minus insurance and other bills. That’s why rental properties are such an excellent long-term investment. Usually, you can still collect rent long after you pay off the mortgage. That gives you a long-term income stream.
More Retirement Options
When you own multiple homes, you’ll have more places in which you can choose to retire. Then, when it’s time to collect your final paycheck, you can choose which home you like best (and also which area you like best) and decide to live in that one. Basically, you can use your home to give you more financial leverage during retirement.
What you do with your other properties is up to you. You can keep your other homes and use the rent money to supplement your retirement funds, or you can sell the property and also use the cash to further enjoy your golden years. An investment property can give you more financial freedom in your later years, especially if you’re able to pay off the mortgages on all of them.
You Get to Provide a Home to Someone
Most people complain about their landlords, but who’s to say that your tenants won’t love you? One of the nicest things about being a landlord is that you get to provide a person or family with a place to live. You’ll be providing a space where they can make beloved memories, and there’s a chance that someone may refer to it someday as their “childhood home.” And if you do a good job responding to maintenance requests and charging fair rent, you’ll be positively contributing to that.
You might want to use a lawyer directory before you become a landlord because it’s almost inevitable that you’ll get at least one bad tenant. Bad tenants are those people who consistently don’t pay their rent on time, who consistently and severely damage your property, and who run illicit activities inside the home. Sometimes, these tenants can be incredibly difficult to evict, depending on which state you’re renting in.
Have a good eviction lawyer on hand just in case you need to consult with them, and if you do manage to find your dream tenants, do what you can to encourage them to continue renting the home for an extended length of time. And before you offer a lease to any tenant, always, always run a tenant background check.
When you’re a landlord, you’re responsible for maintaining a habitable environment for your tenants. It’s your responsibility to respond to maintenance requests, like clogged toilets, faulty wiring, and rat infestations. If you have a day job, it can be incredibly difficult to find time to handle these maintenance requests, especially if you have multiple rental properties. You could always use a property management company to handle maintenance requests for you and collect rent, but keep in mind that you’ll have to pay them monthly, which could reduce your profitability.
An investment property is nothing more than an investment, and every investment carries risk. The risk for you is that you won’t be able to charge a high enough rent to counterbalance the mortgage payments, and so you won’t make a profit. You’ll still be building equity, but you won’t have that extra pocket cash that every landlord hopes for. In addition, you could wind up losing money on the property if the home values in the area plummet. Such is the nature of real estate investment.
Of course, owning rental properties takes cash. You have to have the money either to pay for the house or have at least a 20% downpayment to get a mortgage without PMI (private mortgage insurance). Do you have the cash to do either or both of these things? Then rental properties can be a very good investment option.
If not, another way to access real estate is through publicly traded REITs or crowdfunded REITs. Both of these options allow smaller investors access to real estate.
If you’re able to do repairs and maintenance on your own, managing properties yourself will save you a ton of money. If not, hiring a property manager might be your best option. Yes, they cost money. But if it makes life easier for you and allows you to have positive cash flow, it’s probably worth the money.
The Pros and Cons of Being a Landlord
In short, becoming a landlord is a great way to make money and set yourself up for retirement, all while providing a home for someone. However, dealing with bad tenants, property management, and the risk of lost profit can make it difficult. Hopefully listing out these pros and cons can help you make better informed decisions about becoming a landlord!
While being a landlord definitely comes with its burdens and risks, most of these risks are surmountable with a bit of planning and know-how.
Robyn is a millennial mom with a passion for personal finance. She has her MBA and has been studying Personal Finance on her own for as long as she can remember.
She has always been “into” personal finance but got inspired to start her blog after a period of extended unemployment. She says that experience really changed how she viewed her relationship with money and the importance of accessible personal finance education. Read more at A Dime Saved.