When we had family over for dinner last weekend, I walked in on my brother-in-law, Gil, checking out real estate investment courses online. He jumped at the sight of me and apologized for disappearing from the table and into the family room. Not meaning to stay gone for so long, he explained that he just got caught up in trying to figure out how he could carve out a real estate investing career for himself in Naperville like I’d done in Chicago. After we had ourselves a good laugh about how I “snuck up” on him, I asked what interested him most about investing. Turns out, he’s thinking about being a landlord here in Illinois since buying houses to renovate and resell, like I do, sounds too risky for his blood. I was quick to point out, though, that while owning rental properties is a solid real estate investment strategy, the reality of being a landlord wasn’t always so rosy.
The Reality of Being a Landlord in Illinois
It’s fairly typical of potential investors, like Gil, to assume that buying properties to hold as rentals is an easy, even safe, way to begin a career in real estate investing. By comparison, buying, renovating, and selling homes can seem intimidating, especially when you have little-to-no experience assessing market values or performing major repairs. Purchasing a property and getting tenants to cover the mortgage, on the other hand, looks manageable and certainly profitable over the long run. Of course, looks aren’t everything, which is why you sometimes have to dig beneath the surface to unearth what’s real—even when it comes to investing. So, before you buy that rental, let’s examine both the rewards and the risks of being a landlord. Whatever you ultimately decide to do, an informed choice is always going to be a better choice.
Rewards of Being a Landlord
To begin, we’ll look at how investing in real estate rentals and becoming a landlord can be rewarding—both in the short and long run.
- You can earn passive income. The biggest reason a lot of real estate investors decide to buy rental properties is for the chance to earn a passive income. And, you can achieve this by buying a property at the lowest possible price, keeping operating costs such as insurance and upkeep low, and charging market rents—something that’s not hard to do in certain up and coming Chicago neighborhoods, for example. Ideally, this strategy covers all of your expenses and then some. Of course, the more that’s leftover the more there is for you to pocket.
- You may qualify for tax deductions. When you own investment property, you could qualify for tax breaks that homeowners don’t have access to. If you take advantage of these deductions, it can boost your bottom line—and, increase the passive income you make. Mortgage interest and fees, renovation expenses, marketing costs, and property insurance are all examples of possible deductions. Even the normal wear-and-tear, called depreciation, of your property may be deductible. Since property taxes here in Illinois are some of the highest in the country, you’ll need all the breaks you can get.
- Your property could appreciate. Under normal circumstances, real estate appreciates over time. Even when the market does take a dip, it doesn’t typically fall as far as the stock market. And, in some of the better places to buy rental property in Illinois, like Peoria and Columbia, it’s probably safe to expect a good rate of appreciation. But, wherever you invest in the state, buying property to hold as a rental now does have the potential to yield high returns when you sell later—especially if you make improvements or add high-demand amenities.
Risks of Being a Landlord
Since there are also risks to keeping an investment property as a rental, however, it’s important to consider those as well. Here are three that top my list:
- You will deal with problem tenants. Even if most of your experiences with tenants are relatively painless, the odds are that you will also have problems. Yes, it’s possible that your tenant issues will be limited to late-night maintenance calls or infrequently bounced checks. But, it’s more likely that you’ll have to deal with occasional property damage, complaints about noise, and tenants who can’t—or refuse to—pay rent. And, evictions aren’t fun, nor are they fast or cheap, in places like Cook County. So, be prepared to push a lot of paperwork and possibly punch a hole or two in your profits if you get a tenant you need to force out.
- You will incur holding costs. Holding costs are an inevitable part of business when you invest in real estate; but, as a landlord, they can be both substantial and persistent. After all, for as long as you own the property, all of the expenses associated with it are yours, whether you’ve got a tenant in place or not. So, anytime your rental is vacant, you have to pay to hold it. These costs usually include your mortgage payments, utilities, property insurance to protect your investment, and taxes. But, by no means is this list exhaustive.
- You will have ongoing property maintenance. Unfortunately, you don’t ever get a break from the ongoing care and upkeep that are a part of the responsibilities of being a landlord. It won’t matter if you’re on vacation, nursing a cold, or dealing with a family emergency, either. You’re accountable for everything from a dust-clogged filter in a window air conditioning unit to a collapsed roof after a severe snowstorm, no matter how inconvenient—or expensive—the repairs may be. Just generally keeping things looking nice and running smoothly can be a pain. But, if you want good tenants who pay market rents, you’re going to want to clear the walkways and repaint your property regularly. If you own a rental in someplace like Naperville, you’ll need to do these things whether you want to or not—or, face the consequences of violating the city’s maintenance rules.
If weighing these pros and cons has caused you to doubt whether being a first-time landlord is for you after all, think about buying, rehabbing, and selling houses instead. The hassles that come with being a landlord aren’t for everyone—they’re certainly not for me. Plus, flipping houses can be less risky than holding rentals since the shorter turnaround time for selling allows you to work within more predictable market conditions. And, because there are always going to be risks to investing in residential property no matter how you slice it, I’ll take some predictability where I can get it.
Of course, there is another way to mitigate the risks you might face by investing in real estate: investing in a ready-made business model that provides you with the tools and the team to help you turn flipping houses into a good business, even if you eventually become a landlord, too.
Model Investing Success by Investing in a Successful Franchise
Very early on in my career, I thought being a landlord might be for me. So, I bought a house, held it as a rental, and spent the next several years watching tenants—and my patience—come and go. Not every tenant was a pain, mind you. But, constantly dealing with finding new ones was. Honestly, I wasn’t a big fan of updating the same property over and over again, either. When it became clear that I wasn’t happy being a landlord, I decided I wanted out of investing.
But, after learning that by becoming an independently owned and operated HomeVestors® franchisee, I could buy, renovate, and sell houses for a living instead, I sold that rental and changed strategies. And, because my business approach modeled the tried-and-true strategies that other HomeVestors® franchisees across Illinois have been implementing for years, I became my own success story. So, not only do motivated sellers come looking for me, would-be investors often do now, too—even if they do use the ruse of a family dinner to do it.
Don’t get caught investing in a strategy that may not be for you. Contact HomeVestors, instead, to discuss how you can strive toward your investing goals by owning an Illinois HomeVestors® franchise like me and, now, Gil.
Each franchise office is independently owned and operated.
HomeVestors of America® is the nation’s only real estate investing franchise, providing business opportunities to real estate and investment professionals across the nation.