Some financial advisors claim that investing in a residential rental property is a good way to create wealth. However, everything is not as rosy as it seems. Being a landlord comes with its share of challenges.
The risks of being a landlord start from the very first step, i.e choosing the right location to buy a property and continue even after letting out the house.
There are many other risks of being a landlord. Knowing them will make it easy to evaluate whether being a landlord is worth it.
Risks of renting out your land or house:
Selecting the Right Property:
Choosing the right property at a good location is the first challenge faced by aspiring landlords.
The selection of the right location and property play a crucial role in determining the demand and rental value of the property.
The price of the property also plays a significant role in your returns. Buying an expensive property makes it hard to get a good return on your investment.
On the other hand, going for a fixer-upper because it is available at a lower price is a risky decision as it requires cash, time, and skill to make repairs and renovations.
This problem can be solved by approaching the right management companies or real estate agents. They can guide you in choosing a property at a good location with rental demand.
Preparing the Property:
Preparing a property to be in perfect renting condition demands time and effort.
You have to ensure that every corner of the house is fresh and welcoming to the tenets. This may involve works such as a change of flooring, fresh paint, and lawn maintenance.
The process is repetitive as every time a tenant vacates the house, you must dedicate time and money to make the house ready for the next tenants. However, asset management companies are a good option if you do not have the time to manage your property.
Finding Good Tenants:
One of the hardest struggles of being a landlord is finding good tenants for your property. Responsible tenants pay rent on time, use the property carefully, and do not cause trouble.
Finding a good tenant involves the vetting process, which involves background checks and credit history. The process is often time-consuming and costly.
In some areas, real estate companies help investors to find tenants. They show the property to prospective tenants and vet them on behalf of the owner in exchange for commission or fee.
Maintenance Issues:
Every property demands maintenance. Leaking pipes, blocked drains, pesky pests, etc. are some of the common problems encountered by tenants.
Tenants demand your attention to solve these regular maintenance issues.
Expensive maintenance works may drain your money and have a negative impact on your wealth. For example, replacing a leaking roof may cost thousands of dollars that eat up months of your rental earnings.
In the same way, painting the house, replacing electronics, or getting new flooring can cost way higher than the rent.
Long vacancy periods:
The long vacancy period is one scenario dreaded by landlords. You tend to lose rental income for the period when the house is vacant but have to pay the taxes, bills, and EMIs.
A house may be vacant for a long time due to issues such as high rental, bad location, heavy competition, low-interest rates, bad economic conditions, poor property maintenance, etc.
To avoid long vacancy periods, you can maintain a waiting list of tenants who can move in as soon as the property gets vacant.
Finding the right property manager:
Hiring a good property manager is essential if you do not stay close to your rental property.
Property managers can help you in advertising the property, showing it to tenants, vetting the prospective tenants, and overseeing the regular maintenance of the property.
Finding a property manager is a time-consuming job in itself. You have to scour through various agencies and managers to find the best match for your preferences. Asking for references from friends and family can make the job easy for you.
Legal issues:
When you are renting out your property, you are effectively starting a business. As a landlord, you have to educate yourself with the property legislations and laws applicable to landlords.
Keeping up-to-date with the federal, state, and local housing laws is challenging as they keep changing from time to time.
If you find understanding the law to be challenging, you can approach a real estate attorney to help you navigate the path of becoming a landlord.
Though there are some risks involved in being a landlord, you can handle them easily with proper research and careful planning.
Choosing the right property manager or maintenance agency can help you overcome the difficulties of being a landlord and enjoy the extra income from the property.
Apart from the risks, there are also many advantages of investing in rental accommodation and becoming a landlord. Here are some of them.
Pros of being a landlord
Earn additional income:
Investing in a rental property aids to earn extra income as you can be a landlord while still having your regular job. With proper scheduling of the maintenance and timely upgrades, you can earn well from your property.
Save taxes:
All the expenses incurred on repairs and upgradation of the property are business expenses, which can be deducted from your taxes. Interest, depreciation, repairs, travel expenses, home office maintenance expenses are some of the major tax deductions available for landlords of residential properties.
Pays for itself:
A rental property pays for itself every month. The rent received can pay for the mortgage, taxes and other expenses. You can own a property without even paying the mortgage from your pocket.
Adds to your net worth:
Investing in a rental property is a smart move to increase your net worth. The value of the property increases over time and adds to your net worth, which in turn, improves your financial position.
Flexibility:
Being a landlord, you will be the owner of your business. You can set the rent, and other terms and agreements of the contract with the tenants.
Investing in a good rental property helps you to earn additional income with a minimal time commitment. The property improves your net worth and is a dependable long-term investment as the rent from the property can be used to pay the mortgage and other expenses.
Is being a landlord immoral or a bad idea?
Being a landlord is a good idea as you can help families without their own homes to find suitable accommodation while earning additional income for yourself.
Though some people feel that land lording is immoral, it is not exactly true. Responsible and compassionate landlords are a blessing for people who are in dire need of housing but cannot afford to buy a home.
You can be an ethical landlord who cares for the tenants and refrains from exploiting tenants for personal gains. Here are some pointers to be an ethical landlord.
- Treat your tenants like people, not like business.
- Present a written agreement that spells all the terms and conditions in a clear and concise language.
- Communicate with the tenants regularly and be accessible when they are in need.
- Respect the privacy of the tenants.
- Be humane while fixing or increasing the rent.
Being a landlord has its share of pros and cons.
The risks of being a landlord involve finding the right property at the right location, searching for good tenants, taking up the regular maintenance and repairs, and keeping yourself updated about the housing laws.
While the cons of being a landlord include generating extra income, being your own boss, and helping people find a roof above their heads.
