Many people dream of being a landlord. While the concept and idea of making a living, or adding passive income from rental properties is intriguing, there are a lot of things to consider before jumping in and making the commitment to becoming a landlord.
The biggest advantage of being a landlord is that it will allow you to build your assets. Often the home can bring more in rental income than what it costs you to pay the mortgage. For those who are debt free on the house, you will have a significant amount coming in each month. If you got in over year head and end up having to sell the house at a loss, there are income tax breaks for doing so per a tax calc. Since being a landlord is a business, there are many things that can be done to help with the tax burden.
All is not fun and games being a landlord though. There will always be maintenance costs. Many of them will result in thousands of dollars if not taken care of immediately. For instance, a hot water heat that breaks and floods the basement will need immediate cleanup, and a new water heater must be installed. If not, the landlord is liable to set the tenant up in a hotel until the repairs can be made.
Most insurance companies will charge more to insure a house that is being rented out. The fact is tenants will not take care of the house the same way the owner will. This added risk of damage means higher premiums.
Increased income taxes will come if you are reporting the rent as a source of income. While it is tempting to just collect the money and not worry about the taxes, stiff penalties could be imposed if you get caught.
Repairs will be needed. In your own house it is easy to overlook that hole in the drywall, or the missing plank on the deck. These become liabilities in a rental. Repairs need to be done right away, and if you do not have the time or know-how to do them yourself, you will have to spend money to hire someone.
Tenants that don’t pay are sure to come around eventually. While evicting them may seem easy, it is quite the process, and several months’ worth of rental income and legal fees can be lost in the process.
Once the tenant is out, there may be a month, or several months, that the house sits vacant. Every month that goes by hundreds or thousands of dollars are lost and can never be recouped. For a place that is paid off it might not be too bad, but if there is still a mortgage on the property, the landlord suddenly has to pay it out of pocket.
Before getting into the business of being a landlord, you should know the local laws regarding being a landlord. This might mean scheduling time with an attorney, or at least spending a while online researching and reading. When it comes time, always have a lease signed. Regardless of how well you know the person, things can go south in a business relationship. Always make sure to disclose everything about the property. If something does not work right, such as a dishwasher or microwave, inform the tenant and have the disclosure in writing. If not, a lawsuit could happen. Above all else, make sure to maintain a slush fund. When things need repaired, the money should be easily accessible.
There is nothing wrong with being a landlord. In fact, for those who have the time, and are handy around the house, it can be a great source of income. But before jumping into it, make sure you know exactly what you are getting into. Getting out of the landlord business can be a lot harder than getting into it.
That’s definitely something I aspire to be, a landlord. Though where I live it’s hard to make a profit on a new property, it’s more like an investment. I know someone who owns a few apartments and rents them out and only has to pay about $40 each month as the difference between the rent and the mortgage payments. But since housing prices increase about 5 – 7% each year it’s still a pretty good idea.
We’ve rented out our condo for two years to the same tenants. We’re lucky – they’re great! We have had to deal with maintenance issues though, such as repairs to shelving and increased strata fees.
I would love to have the income of some rental properties.. But I just don’t think it is a good option for me. I am just not all that handy around the house, and would need to pay out of pocket in order to get repairs and maintenance done.
Jefferson
Very informative article about the pitfalls of landlording. Just wish you would have discussed the passive income part of landlording in more detail like the title of the post led me to believe you would.
I wouldn’t mind having a rental property or two—but I would definitely want to be in state that is more friendly to landlords in that case.
I’ve given this subject so much thought, and most of the issues you bring up here have kept me from going full-bore with it. When I did my post on how much money I could make as a landlord, I was surprised to see how much that would stack up over time. You definitively need 2 to 3 units to make money in the short run. But in the long run, the value of the house plus the income from the rentals could become much more than comparatively investing in an Index fund.
What are your thoughts about Real Estate Investment Trusts (REITs) instead of becoming a landlord? Seems like REITs are a great alternative to owning rental property outright while still gaining some of the benefits (rental income in the form of dividends, diversifying your portfolio, etc.).
I’ve also considered buying a condo to rent out, but 1) seems like there’s a lot of risk involved + taking on additional debt and 2) the ongoing upkeep seems like a ton of work. If you have good tenants, great! but if you’re not, you’re screwed!
This is something that I think about, but I surely wouldn’t call it passive. You have to keep up with too much stuff that it excludes it from being called passive. Unless you hire a management company, so you don’t have to do anything, but collect a check.
My mom and dad have been landlords for years now and their houses have been paid for many years as well. They said it was the best decision they ever made and now they just enjoy the money they get and go on some pretty awesome vacations.
Well, I suppose its not all daisies and roses being a landlord. Still, I’d contend that the benefits and the income surely beat the odds. Its a nice source of some extra “passive” income if one is upto it.
We have been landlords for 9 months, and we rent to my brother. It works for us and it’s nice passive income!