Becoming a landlord: Do you have what it takes?
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Whether you have extra cash you’re looking to invest or extra space in a home you already own, it can be tempting to jump into the landlord game. After all, earning passive rental income can seem like easy money. And with today’s high inflation and tough real estate market, who couldn’t use some additional income?
Jill Wente, a Realtor with Better Homes and Gardens Real Estate Gary Greene in Spring, Texas, says that many of her clients entertain the idea of establishing a rental property and becoming a landlord. “Most clients are thinking about buying a move-up property for themselves and holding on to their current home to turn into a rental property,” she says.
But before you decide to rent out your home or buy something new, ask yourself, are you really cut out to be a landlord? Here are some of the key things you should consider.
Landlords manage both property and people
Being a landlord isn’t just sitting back and watching the rent checks flow in. It’s a lot of work: Not only do you have to manage the property itself, making sure everything is in good repair and all bills are paid, you also have to stay on top of your tenants and how they treat your investment. This is not a job for the laid-back, or the non-confrontational.
Real estate can be a good investment. But as a potential landlord, you need to be realistic about your ability to afford the property — whether rent checks are coming in or not. Something unexpected will always come up, and you need to make sure you can cover both routine maintenance and emergency repairs.
“Chances are, your rental will be vacant from time to time,” says Wente. “Your next renter rarely comes walking in the next day. It may only be a couple of days, or it may be as long as 60 days.”
Doug Quattrochi, executive director of MassLandlords, a nonprofit association based in Massachusetts, echoes that sentiment. He advises prospective landlords to ask themselves this question: “Will the rents pay for the mortgage, taxes, insurance and repairs, with extra, in case I have a vacancy?”
It’s not a get-rich-quick game, Quattrochi continues. “Real estate can be very worthwhile, but it’s usually ‘get rich slowly.’ You should invest thinking about your retirement, your children and the long-term.”
Being stuck with a bad tenant is one of the main reasons landlords fail. “One bad renter can ruin you,” says Quattrochi. He recommends building a network of support to help deal with tenant-related issues: “Join your local landlord club or association. Other landlords can be invaluable when it comes to knowing what to do or who to hire when problems arise.”
It’s crucial to have a good grasp of local landlord-tenant laws. “Always know and understand your federal, state and local rental laws,” says Brittney Benson, chief operating officer of the National Association of Independent Landlords. “Many landlords learn the hard way that not being knowledgeable about the laws can end in costly lawsuits or lost rental income.”
You also need to be prepared to be the bad guy when necessary. It’s important to assess if you can emotionally handle tenant relationships, Wente says: “Ask yourself if you can be objective. When a tenant is unable to make the rent payment because of the saddest story you’ve ever heard, what are you going to do?”
One thing all experts agree on: Tenant screening is a must. “Do your due diligence when selecting renters,” says Benson. “Do as much screening as you possibly can, regardless of the cost associated with it.” Taking the time to screen a prospective tenant before a lease is signed could save you a lot of hassle, money and unpleasantness — including a potential eviction.
Typical landlord expenses
- Down payment: If you’re investing in a rental property, you’ll be forking over what is likely to be a sizable down payment. When purchasing a second property, most lenders will require at least 20 percent down to secure financing. “The good news,” says Wente, “is that you will have the opportunity to gain price appreciation on 100 percent of the property while having only 20 percent in it.”
- Insurance: Insuring a rental property is more expensive than insurance for a home you live in. If you decide to rent your current property, you’ll see a change in your homeowners insurance. “Because your home is no longer owner-occupied, your homeowners insurance is going to increase,” says Wente. Landlord policies are typically 25 percent higher than standard homeowner policies, according to the Insurance Information Institute.
- Maintenance: Upkeep costs can add up quickly — if you’re not the handyman type, be prepared with a reserve fund to pay for fixing things like broken pipes or electrical issues. It’s also smart to compile a list of people you trust, and can afford, to hire. “When repairs are needed, do you have contractors you can depend on to get the plumbing fixed and the air conditioner back on?” asks Wente.
- Vacancy: There will likely be periods when your rental is unoccupied, or tenants simply don’t pay the rent on time. And that can cause cash-flow problems. Benson suggests potential landlords ask themselves, “Do I have the extra funds to cover rental costs, such as mortgage payments or property taxes, if there is a problem with tenants not paying rent?”
Other common hassles
Money isn’t the only thing that can make a landlord’s life difficult. Time management can cause problems as well. “Many people decide to leave the rental property business because of time constraints and attention required,” says Benson. “Maintenance requests, lock-outs, repairs, evictions and numerous other potential time-consuming surprises” are all part of the process, she says.
Remember, you will be your tenant’s very first text or phone call anytime something goes wrong — no matter what time of day that might be. Wente asks clients “if they’d mind getting a call on a Saturday morning with a toilet emergency, or at 11 o’clock at night because the air conditioner isn’t working.”
Quattrochi suggests carefully considering the logistics of managing a property: “Who is going to have keys for an emergency, or am I able to get there quickly myself?”
And don’t forget about the work needed to market the property to prospective tenants. Photographing, listing and showing the property, screening applicants: The entire rental process takes time.
Should you hire an outside property manager?
As a landlord, you’ll need to decide whether you want to manage the property yourself or pay someone else to do it. Hiring a property-management company to handle things makes landlord life easier — but also, of course, more expensive.
“Property managers can be an incredible resource for some landlords,” says Benson. “If the owner lives out of state or far from the rental property, a property manager might be a great option.”
It’s important to know exactly what your property manager will charge, and what he or she will handle versus what is still your responsibility. Don’t make assumptions. And make sure to thoroughly read your contract — and ask questions — before signing on.
Another thing to consider is how much control you might be giving up. “Property managers will manage the way they want, not necessarily the way you want,” says Quattrochi. “Get to know how they screen tenants, supervise contractors and bill their fees. Don’t assume that just because you have a manager, you don’t need to audit their handling of maintenance issues and renter/customer service.”
Becoming a landlord checklist
If you’re ready to try your hand at being a landlord, do some extra planning to avoid winding up with more headaches than profits. Here’s a checklist of things to make sure you take care of:
- Calculate how much rent you’d need to charge to cover all your costs
- Familiarize yourself with laws about fair housing and landlord-tenant rights
- Create a list of contractors you can depend on and trust
- Weigh the pros and cons of using a property manager
- Network with other landlords to create a support system
- Carefully and thoroughly screen potential tenants
“It’s a hard business to be in for some people,” Benson says. “But if you’re prepared and perform your due diligence, it can be very easy as well.”