With interest rates low, the economy still sluggish, and many homeowners that need to sell but are underwater on their mortgage, investors are looking for way to earn returns in the market, or at least not be forced to give up their home.
Becoming a landlord can be a great way for investors to make a lot of money, or just as easily lose their shirt. I bought my first investment property at 23 years old, and fortunately it was a successful endeavor. Direct real estate investing certainly isn’t for everyone. Here are some of the things I learned from my experience as a landlord:
It takes a lot of time
Being a landlord is a very time consuming job, and it isn’t a 9-5. Have you ever had a pipe burst at a convenient time? Be prepared to spend a lot of time managing your investment. Maintenance such as lawn care and snow removal, getting rent payments, and advertising for new tenants are examples of the major time-sucks landlords’ experience. And don’t think you can just hire someone to do all these things for you. Although you can, it will eat through any spare cash flow the property produces.
Be able to carry the mortgage without a renter
Be prepared for a worst case scenario. If you can’t pay the mortgage without a renter in your property, don’t even think about becoming a landlord. You obviously don’t want to own a rental property without renters in it, but you also don’t want to be financially dependent on having them.
Be realistic about income
Ideally, your principal, interest, and insurance payments (PMI) will represent about 50% of your rental income. The remainder needs to be set aside for maintenance, emergencies, and such. This also means you need to be pricing your rent high enough to double your PMI. If your property can’t demand that level of rent, I would reconsider the decision to purchase the property.
When projecting income, plan on receiving 11 months of rent each year. This will allow for the time it takes to get old renters out and new renters into your unit, as well as the possibility of a deadbeat renter that won’t pay their bills.
Be picky about your renters
I’m not recommending that you illegally discriminate, but I do recommend you be smart about who you rent to. The best way to avoid the hassles of eviction is having quality tenants in the first place. Call their references, verify their income is at least 4 times the rent, and require 1 months’ rent for security deposit and first month’s rent at the time they sign the lease.
Do not allow pets… ever…
As an animal lover and owner, that was the hardest thing for me to enforce. If you allow pets, you will have to replace the carpet every time the tenants move out (assuming you have a quality property and not a dump). You would be amazed at how quickly a dog or cat can eat through a security deposits worth of baseboards and carpet. What about outside pets? When it starts to snow, you really think they are going to leave their dog in the cold? I don’t think so.
Becoming a landlord can provide a great source of passive investment income, but it shouldn’t be taken lightly. I have seen a lot of investors lose money rather quickly because they didn’t know what they were getting themselves into. If you want to be a landlord but don’t have any experience, try to hook up with an experienced real estate investor to help walk you through the process. If you want to invest in real estate but don’t have the stomach for being a landlord, REIT mutual funds are certainly an option.
So what do you think? Have you ever considered becoming a landlord? If you are, or have even been, a landlord feel free to share some additional tips!
Alan Moore is a fee-only financial planner and founder of Serenity Financial Consulting in Shorewood WI. Follow him on Twitter @R_Alan_Moore. You can contact him at firstname.lastname@example.org, 414-455-5313, or visit his website at www.SerenityFC.com. Want more education? Download your free guide to the “10 Easy Steps To Securing Your Financial Future Today.”