Published February 04, 2013
“Being a landlord is fun, doesn’t take up too much of your time and can provide enough income that you can quit your day job and just collect rent checks all month!”
You’ve likely heard this pitch on a late-night cable TV infomercial and thought that it might sound a little too good to be true. Guess what? It is. Owning investment properties is hard, time-consuming work, and it can be very stressful and disastrous to your finances if you are not prudent in your endeavors.
However, even though it does have its challenges, it can also be very financially rewarding on a long-term basis. With some hard work and smart choices, just about anyone can retire with many properties that provide a nice income stream. So if you’re willing to get your hands a little dirty, being a landlord might just be right for you.
Here are a few factors to consider when determining whether being a landlord is right for you.
The buying of property
If you want to be successful in your real estate ownership, you have to understand that real estate is just like any other job: The more you put into it, the more you get out of it. And it starts with buying decent quality, cash-flow positive properties located in low vacancy and fair credit quality areas.
But experienced investors know that buying a good property is actually a lot tougher than you might think.
Anyone can go out and buy property X, Y or Z, but will that property produce sufficient income and investment returns for the risk and hassle you are taking on as the owner? About 75 percent of real estate investors really do not make very much money on their acquisitions. Bad tenants, renovations gone astray, poor cash flows and HOA issues can all make an owner wish they had left their money in the bank.
So ask yourself: Am I willing to spend the next six to 12 months, every weekend, driving neighborhoods, touring open houses, learning about property management, penciling out real estate deals, making offers on properties, then going through the escrow and due diligence process to take ownership of a good quality property?
If you’re not willing to do the time-consuming work to find those diamonds in the rough, you probably will lose money on your purchase and should just avoid becoming a landlord in the first place.
Owning and managing your property
Task No. 2 is the owning, leasing and management of the property. Again, many people think this is easy, that properties rent themselves and that all tenants pay on time and never cause any hassles. Good luck finding someone who actually owns rental properties and will opine that as a fact!
All real estate comes with potential issues such as floods, overflowing toilets, broken appliances, etc., and you, the owner, have to deal with those problems. Tenant relations can also be a real challenge. (Secret hint: Smart landlords know that if you treat your tenants well, hopefully they will return the favor and your life will be easier and your ownership will be a lot more successful.)
You also have to record all the rents, hire contractors and maintenance people, advertise and lease the property, pay bills and file your taxes. So there is a lot more to it than you think.
Now, ask yourself again: Do I want to deal with all those issues? You could just leave your money in a mutual fund and probably do just as well.
If you do want to take on the challenge, you should have a long-term ownership agenda and a desire to learn about investing in real estate. Just about anyone can pick up five to seven properties in the next two to three decades and probably retire comfortably just about 30 years from today. But is it the right “job” for you?
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Leonard Baron is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches potential real estate buyers how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com.