Becoming a landlord can be lucrative. Owning rental property can generate passive income that lasts a lifetime. And often, the returns are higher than the returns of the stock market.
But just because rental income is considered passive and can be very profitable doesn’t mean it’s easy. Being a landlord has its challenges, too.
In order to have a balanced and realistic view of what it takes to become a landlord, consider the advantages and disadvantages below:
Advantages of Becoming a Landlord
Earning rental income is one of the most attractive aspects of owning real estate. In fact, rent can often cover your mortgage and then some. Whatever money is left over after all your property expenses are paid is called cash flow. The more cash flow you have, the more money you can pocket and save. Over time, this can allow you to create some serious wealth.
Though landlords get taxed on rental income, they can write off a lot of their property expenses. This is because the IRS considers these business expenditures. So you’ll save a lot of money at the end of each year.
For example, as a limited liability company (LLC), your property insurance, mortgage insurance, property taxes, property depreciation, and many maintenance and repair costs are all tax deductible. Over the years, these savings can really add up.
Real estate tends to appreciate over time. This isn’t because the house or the building itself increases in value. In fact, with time it usually loses value. However, the land it sits on almost always appreciates. This is because land is a limited resource. Or as Mark Twain said, “buy land, they’re not making it anymore.”
By taking a buy and hold approach, you can not only profit from rental income but from selling the property for a higher price later down the road. That way, you make money in two ways at the same time.
Investing in real estate can increase your overall net worth. It allows you to grow your retirement nest egg and move further down the path to financial freedom.
You get to be your own boss. And eventually, you can sit back as you begin to outsource responsibilities and automate operations with software like a property management website.
Disadvantages of Becoming a Landlord
As a landlord, you’re responsible for finding, screening, and managing tenants, which can all be very time-consuming.
Among other things, this means advertising your property and showing it to prospective tenants, overseeing rental contracts, collecting rent, and responding to resident inquiries. For example, when someone loses their keys in the middle of the night, they’ll need you to let them back into their apartment.
Inevitably, you’ll face tough decisions. You may need to file evictions, which can be an emotionally taxing task, especially when your tenants fall on hard times by no fault of their own. Other times, sour tenants might trash your apartment when leaving, which brings us to our next point.
Ongoing Maintenance and Repairs
Landlords are responsible for general maintenance and repairing any damage to the property. This includes issues with plumbing like burst pipes, issues with the roof like leaks, and HVAC issues like broken boilers.
Keep in mind, repairs are not always cheap. Replacing a bad roof can cost up to $10,000. If you’re not prepared for the unexpected, repairs like these can easily squash your returns and even cause you to lose money on your investment. And small items like a clogged drain? You’re responsible for repairing them, too. Even if you think renters could handle them on their own.
As a rule of thumb, expect to spend 1% of the property’s value on annual maintenance.
Like with any investment, owning real estate comes with risks. For one, you risk the property depreciating in value through damage and wear. On top of that, owning property exposes you to drops in the real estate market, which are impacted by the overall economy as well as changing demographics, interest rates, and government policies.
Landlords may also face legal challenges. Whether it’s disputes with unhappy tenants or difficult bureaucrats, you’ll need to stay on top of local property laws to protect yourself and your finances. One way to mitigate legal problems is with a liability policy or hiring a lawyer, but these will add to your expenses.
Finally, landlords risk suffering costly vacancies. If you lose tenants and your rental income falls, you still have to pay the mortgage. If things keep going south, your money is still tied up in the property. And you may not be able to sell it since the real estate market is notoriously illiquid.
At the end of the day, landlords are the ones responsible for their property. Renters can walk away relatively easily, but you can’t. You have to make sure the asset is properly run and maintained on an ongoing basis. This includes everything from stressful evictions to complicated tax accounting.
Becoming a landlord isn’t for everyone – but it definitely has its perks. If you’re a handyman or you like to interact with people, this could be the right job for you. If not, you can still invest in real estate without becoming a landlord by hiring a property manager.
Whatever you do, consider the pros and cons carefully. And remember that real estate is a long-term investment. The longer you hold your property, the more you maximize your returns and the more the benefits will outweigh the drawbacks.