While Margaret and I were talking about the different home rehab loans available to investors, I could tell that something else was on her mind. She hadn’t yet bought an investment property, but was typically pretty excited about the prospect of doing it and had been picking my brain at every opportunity for months. During our last chat, however, she was clearly distracted. When I pressed her, she expressed doubt over whether being a landlord is really worth it.
Even though I’d successfully built a property portfolio of rentals through the years, she’d met other real estate investors who seemed to be overwhelmed by the hassles of being a landlord or who had gotten in over their heads and lost a lot of money. It made her question how she, as a new investor, could differentiate herself and rise above the risks to ensure having rentals benefitted her bottom line. For one, I told her, she had me to guide her.
Is Being a Landlord Worth It to Your Bottom Line?
Like Margaret, I’ve met other investors who hesitate to invest in rental property because, after one or more bad experiences, decided that the hassles of being a landlord were just too great. They certainly aren’t alone and they aren’t necessarily wrong. Being a landlord poses serious challenges and, when it comes right down to it, is an investment strategy that isn’t for everyone. But, it can also be a critical key to creating diversification in your real estate portfolio and, potentially, long-term wealth. So, it’s important to carefully consider both the risks and the rewards—not just the experiences of others—before deciding if it’s right for you. To help you, here are the main points I shared with Margaret.
Risks of Being a Landlord
- Problem tenants. The thought of dealing with problem tenants may make you cringe and want to avoid becoming a landlord altogether. After all, there is just no way around the fact that you will eventually have to confront a tenant who is too loud, pays rent too late, or causes a considerable amount of damage to the property. And, at some point in your career, you’ll probably have to spend a large sum of time and money evicting a tenant, which can be difficult to do even in the most clear-cut of circumstances. Preventing tenant problems is not impossible. But, it takes a lot of hard work—as well as marketing, applications, interviews, and background checks—to make finding a good tenant easier.
- Ongoing maintenance. Keeping your property safe, clean, and in good working order will remain your responsibility no matter how long you own it and whether you have tenants living there or not. It doesn’t matter how exquisite or expensive that initial rehab was, either. You’ll still have to care for the lawn and pool, repair or replace appliances, and update the plumbing or electrical when it finally goes. You’ll also have to be on hand if a tenant calls about a broken heater in the middle of the night and work to fix the issue as soon as possible—or, risk getting sued. And, the costs to maintain a property just keep going up, which can cramp your style if you don’t have a lot of room for expenses at the end of each month. So, be sure to buy low enough to ensure that you do.
- Greater liability. As the owner of a rental property, your responsibilities as a landlord increase and, with them, your liability. That means if something goes wrong, you will be held accountable for making it right. It also means that it’s up to you to know the local tenant laws, to ensure the building is up to code, and to keep all visitors, workers, even tenants free from injury and possible illness. Just because you didn’t know about the law that requires you to disclose the presence of lead paint, for instance, doesn’t absolve you from accidentally breaking it. The only way to potentially decrease your personal liability is to increase your knowledge and your determination to always operate with integrity.
Rewards of Being a Landlord
- Passive income. The biggest draw to becoming a landlord is the possibility of earning passive income from your real estate investment. Provided you can keep your mortgage and operating expenses low, and charge your tenants market rate for rent, then this possibility can become a reality. Since the difference between what you pay out to run your property—like maintenance costs and property insurance—and what you bring in from tenants is yours to keep, the larger this margin is the better. In fact, if this profit margin is wide enough, you may be able to live off of the proceeds, reinvest them, or save them for buying more properties in the future. If you have multiple properties generating income, paying for a summer home or the kids’ college tuition can potentially come within reach. Your income potential has no ceiling if you work hard and that can be very rewarding.
- Property appreciation. Given a long enough timeline, you can almost bank on your rental property appreciating in value. And, it’s when the value shoots up that selling may be your next move. Even when the real estate market experiences a dip, the shift is seldom as severe as those that occur in the stock market. The effects don’t last as long, or typically have as great of a negative impact, either. So, even in rare worst-case scenarios—like a housing crash—it’s reasonable to expect that things will eventually turn around. All you have to do is hold on until they do. After all, investing in buy-and-holds to use as rental properties means that you, and your potential profits, are in it for the long haul.
- Tax breaks. The tax breaks that are available to landlords are another good reason to consider holding rental property. For example, you may be able to deduct the mortgage interest and other fees associated with your loan, as well as many of the costs to maintain and run the property. This is particularly good news since real estate insurance, renovation costs, travel expenses, legal fees, and other expenses could otherwise shrink your profit margin. You may even be able to deduct the property’s normal wear-and-tear, called its depreciation. Of course, you’ll want to check with your accountant for the full list of investment property tax deductions that apply to your situation. But, because it can help to pad your pockets at every year’s end, it can be worth it to do so.
In my book, the potential advantages of being a landlord outweigh the potential disadvantages. But, I’ve also been able to make the most out of being a landlord because I know where to find the best places for buying rental property and how to get a hold of some great deals. In terms of making sure you do benefit your bottom line by owning rental property, improving this part of your investment strategy should come first and foremost. And, as a long-time investor with a wide range of experiences, I’ve found a good way to do just that.
The Best Way to Make the Most Out of Being a Landlord
The truth is, it doesn’t matter if you want to buy and renovate properties to sell, rent out, or both. You simply risk performing poorly with any investment strategy if you don’t have the right resources to find the best leads for growing your portfolio.