The real estate market has seen a significant trend toward income properties. With the rise of home-sharing platforms like Airbnb and the growing demand for rental properties, it's no surprise that many people are considering becoming landlords. However, before diving headfirst into the world of rental properties, it's essential to consider whether the landlord lifestyle is the right fit for you.
In recent years, income properties have become increasingly popular among investors looking to diversify their portfolios and generate passive income. But is it as glamorous as it sounds? Let's explore the pros and cons of becoming a landlord and what you need to consider before diving in.
Landlord Life
Being a landlord requires a significant time commitment. From finding and screening tenants to handling maintenance requests and managing finances, owning an income property is far from a hands-off investment. You'll need to be prepared to dedicate a portion of your time to ensuring your property is well-maintained and your tenants are satisfied.
Moreover, being a landlord can be emotionally demanding. Dealing with difficult tenants, late rent payments, and potential legal issues can be stressful and draining. You'll need to have strong interpersonal skills, patience, and the ability to remain professional in challenging situations.
Financial considerations are also crucial when deciding whether to become a landlord. While income properties can provide a steady stream of rental income, they also come with a host of expenses, such as mortgage payments, property taxes, insurance, and maintenance costs. It's essential to have a clear understanding of your financial situation and to create a realistic budget before investing in a rental property.
On the other hand, being a landlord can be a rewarding experience. Watching your investment appreciate over time and providing quality housing for your tenants can be incredibly fulfilling. Additionally, owning an income property can offer valuable tax benefits and the potential for long-term financial security.
Understanding Income Properties
Income properties are residential or commercial properties that are purchased primarily for generating income. This can come from renting to tenants long or short-term and through appreciation over time.
Types of Income Properties
Single-Family Homes: Often the first choice for new landlords, these can be easier to manage. However, they can be more costly to purchase and maintain and you need to set parameters for lawn and yard care. Most of the time the tenant is expected to maintain the yard but you'll need to check that it's being done.
Everybody has to start somewhere, but if this is your only rental property and the tenants are behind in rent, then you have to continue paying your mortgage until they catch up or you evict them and find a new paying tenant.
Attached properties-condos/townhomes: - A popular choice for Scottsdale real estate investment property but will usually have a higher HOA fee than most single-family homes that are located in an HOA. This fee will cover most of the exterior maintenance and might be worth it so you're not depending on your tenants to do it. Some HOAs cover roof repair and replacement. There will be rules and regulations that your tenants will need to follow. Many HOAs are putting a stop to short-term rentals so you'll need to know this upfront if you're considering going the VRBO or Airbnb route.
Multi-Family Units: Properties like duplexes or apartment buildings can provide a higher return on investment but come with increased responsibilities. The good news is that if one of the tenants stops paying rent, the others will help cover your mortgage until you find a new tenant.
Commercial Properties: Generally requiring more capital, these properties can yield higher returns, but they often come with longer vacancy periods. This isn't the best start for a first-time investor unless they're going in with an experienced commercial property owner.
Market Trends in Real Estate
Discuss current trends in the housing market, including rising rents and demand for rental properties. Factors such as urbanization, changing demographics, and the shift toward remote work have contributed to increased interest in renting.
The Appeal of Being a Landlord
- Financial Independence: Many seek passive income through rentals, allowing them to build wealth and financial security.
- Control Over Investment: Unlike stocks or bonds, landlords have greater control over their properties.
- Tax Benefits: Rental properties can offer numerous tax deductions that can improve profitability.
Responsibilities of a Landlord
- Property Management: This includes maintaining the property, handling repairs, and ensuring the property is safe for tenants. The tenants should purchase Renter's Insurance but the landlord needs to insure the entire building (or condo unit). Landlords also need to pay any utilities that the tenant isn't responsible for.
- Tenant Screening: Choosing the right tenant can make or break your rental experience. Learn about conducting background checks and ensuring that tenants can meet their rental obligations.
- Legal Obligations: Understanding local landlord-tenant laws is crucial. Discuss topics like security deposits, eviction processes, and the rights of tenants. Make sure you study Fair Housing Act laws and follow them. I've heard of many stories where landlords have violated the rules and paid a hefty fine for doing so.
Challenges Faced by Landlords
- Tenant Issues: Not every tenant will be ideal. Address issues like late payments, property damage, and the process of eviction.
- Market Risks: Real estate can be volatile. Consider how changes in the economy or local market can impact your rental income.
- Time Commitment: Managing a rental property can require significant time and energy, especially if issues arise.
Preparing to Become a Landlord
- Financial Assessment: Consider your finances and what kind of investment you can handle. Discuss budgeting for repairs and unexpected costs.
- Choosing the Right Property: Learn how to select properties that have strong rental potential, including location, property condition, and neighborhood amenities.
- Education and Resources: Seek out books, online courses, and local workshops that can help prospective landlords understand their responsibilities.
Building a Rental Strategy
- Setting Rent Prices: Learn how to set competitive rent prices while ensuring profitability.
- Marketing Your Property: Find effective ways to market your rental property, including online listings and social media.
- Creating a Lease Agreement: It is important to offer a clear, legally sound lease agreement to protect both landlord and tenant interests.
From the Trenches
Both my husband and I handled rental properties. My husband worked at a family-owned construction company. His father built two large apartment buildings in the city of Chicago. My husband ended up taking over much of the maintenance of the buildings.
When he first took over they were lucky to have long-term tenants living there. But as these tenants passed away or moved on to live with family or senior care facilities, new tenants were starting to come in. And that's when the trouble started. Because these buildings were owned by the company they had a real estate attorney on hand to help with evictions. But until the tenants started turning over, they rarely had to evict anyone. We finally sold both of the apartment buildings.
I owned a 4-flat in Chicago. At that time, we didn't do background checks. It was a lower-income area and you'd never find a tenant if you were too picky. I was lucky to get beyond the first month's rent and security deposit (sometimes I didn't get a deposit).
We lived in one of the units (it was huge) when I first purchased the building. It was a neat corner building that took up half a block as there was an unused tavern in the front. We used it for storage. While living there I had a long-term tenant who came with the building and paid her (low) rent on time like clockwork. She was elderly and lived in the building for decades. I felt bad raising her rent and when her nephew finally moved her to a nursing home I found out she was worth millions!
It was easier to control the tenants and the building while living there. But once we moved it became more difficult. The tenants were used to having a landlord come to pick up the rent. I no longer lived close to the building and of course, when I came on the 1st not all of the tenants would be home (or wouldn't answer the door). They didn't have cell phones at the time so it wasn't always easy to contact them.
Then I had a tenant call in the city inspector (she wasn't paying her rent and knew I was ready to evict so she retaliated). This building was built in 1900 and guess what? Lead-based paint was found. I was one of the first buildings in Chicago to be checked for it. The sad part was that it was such a new law there were no parameters for it. We painted and wallpapered over most of it. Sometimes it was easier to remove trim and doors and just put new ones on. But we did a lot of sanding (we wore masks) which I'm sure put more lead paint dust in the air than was ever there before. But we followed the rules at the time and were cleared.
However, the city inspection found other things not up to par with this old building. I fixed them all but kept receiving the same paperwork with the same issues listed that were already taken care of. This meant multiple court visits and I finally proved that the items listed had already been done (this was probably the fourth or fifth time I was in court - I didn't hire an attorney and I should have). When I showed my proof the judge was upset and yelling at the city inspection guys. For instance, the first list of repairs was to remove an old garage. It was done immediately. It kept appearing on future lists. Working with city inspectors was really fun! And costly!
Even more costly (time and money) was evicting tenants. The area was going downhill quickly and at one point some gang was living in one of the units. The tenant I had rented to was gone (these were her friends). I was in court being told I couldn't evict them without knowing their names. I had no contact with them. When the weather started getting cold they moved out on their own because they couldn't get the heat turned on. That was months of no rent.
And the wonderful lady who called city inspectors on me also tried suing me later because of the lead paint abatement issue. This was years later and I no longer owned the place. Because of the area the building was located in, insurance redlining started happening and my insurance was dropped and I couldn't find anything else.
When the ex-tenant's attorney heard that, I never heard back from them again. Oh wait - she also sued me for one of her many kids falling down the steps and hurting themselves (again, this was years later). Same thing, I no longer owned the building and the insurance had been dropped. I also fought the fact that if this happened while I owned the building why didn't she let me know? She never said anything and I believe the attorney realized that it would be difficult to prove. These were "ambulance-chasing attorneys" out to get landlords and hoping for insurance windfalls for their tenant clients.
But wait - there's more! This old building's pipes froze one cold winter day and after thawing the entire full basement was flooded with water that was probably up to one's knees. That cost thousands.
You're probably thinking, well, don't buy an old building in a bad neighborhood. I knew it was old, but friends of my parents owned it and lived there and it appeared to be in good shape. This was back before buyers did home inspections. I felt safe enough in the area to walk my youngest son in his baby carriage. The area did turn quickly though.
Conclusion
Landlord life can offer significant financial rewards but comes with distinct challenges. It's essential for potential landlords to weigh these factors carefully and prepare adequately before making the leap. For those who invest time, effort, and planning, the rewards can be substantial.
Posted by Judy Orr on
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