While my friend Margaret and I were talking about the different home rehab loans available to investors, I could tell that something else was on her mind. She hadn’t yet bought an investment property but was typically pretty excited about the prospect of doing it and had been picking my brain at every opportunity for months. During our last chat, however, she was clearly distracted. When I pressed her, she finally expressed the doubts that had been troubling her. “Is being a landlord worth it?,” she asked.
Even though I’d successfully built a property portfolio of rentals through the years, she’d met other real estate investors who seemed to be overwhelmed by the hassles of being a landlord or who had gotten in over their heads and lost a lot of money. It made her question how she, as a new investor, could differentiate herself and rise above the risks to ensure having rentals benefitted her bottom line. For one, I told her, she had me to guide her.
Is Being a Landlord Worth It for Your Bottom Line?
Like Margaret, I’ve met other investors who hesitate to invest in rental property, because they had one or more bad experiences and decided that the hassles of being a landlord were just too great. They certainly aren’t alone, and they aren’t necessarily wrong. Being a landlord poses serious challenges and, when it comes down to it, it is an investment strategy that isn’t for everyone. But it can also be a critical key to diversifying your real estate portfolio and, potentially, long-term wealth. So, it’s essential to carefully consider both the risks and the rewards—not just the experiences of others—before deciding if it’s right for you. To help you, here are the main points I shared with Margaret.
Risks of Being a Landlord
- Problematic tenants: The thought of dealing with problem tenants may make you cringe and want to avoid becoming a landlord altogether. After all, there is just no way around the fact that you will eventually have to confront a tenant who is too loud, pays rent too late, or causes a considerable amount of damage to the property. And, at some point in your career, you’ll probably have to spend a large sum of time and money evicting a tenant, which can be challenging to do even in the most clear-cut of circumstances. Preventing tenant problems is not impossible. But it takes a lot of hard work, marketing, applications, interviews, and background checks to make finding a suitable tenant easier.
- Ongoing maintenance: Keeping your property safe, clean, and in good working order will remain your responsibility no matter how long you own it and whether you have tenants living there or not. It doesn’t matter how exquisite or expensive that initial rehab was, either. You’ll still have to care for the lawn and/or pool, repair or replace appliances, and update the plumbing or electrical when it finally goes. You’ll also have to be on hand if a tenant calls about a broken heater and work to fix the issue as soon as possible—or risk getting sued. And the costs to maintain a property just keep going up, which can cramp your style if you don’t have a lot of room for expenses at the end of each month. So, be sure to buy low enough to ensure that you do.
- Greater liability: As the owner of a rental property, your responsibilities as a landlord increase and, with them, your liability. That means if something goes wrong, you will be held accountable for making it suitable. It also means that it’s up to you to know the local tenant laws, to ensure the building is up to code, and to keep all visitors, workers, even tenants free from injury and possible illness. Just because you didn’t know about the law that requires you to disclose the presence of lead paint, for instance, doesn’t absolve you from accidentally breaking it. The only way to potentially decrease your liability is to increase your knowledge and determination to operate with integrity continuously.
Rewards of Being a Landlord
- Passive income: The biggest draw to becoming a landlord is the possibility of earning passive income from your real estate investment. Provided you can keep your mortgage payments and operating expenses low, and charge your tenants market rate for rent; then this possibility can become a reality. Since the difference between what you pay out to run your property—like maintenance costs and property insurance—and what you bring in from tenants is yours to keep, the larger this margin is, the better. If this profit margin is wide enough, you may be able to live off the proceeds, reinvest them, or save them for buying more properties in the future. If you have multiple properties generating income, paying for a summer home or the kids’ college tuition can potentially come within reach. Your income potential has no ceiling if you work hard, and that can be very rewarding.
- Property appreciation: Given a long enough timeline, you can almost bank on your rental property appreciating value. And it’s when the value shoots up that selling may be your next move. Even when the real estate market experiences a dip, the shift is seldom as severe as in the stock market. The effects don’t last as long, or typically have as great of a negative impact, either. So, even in rare worst-case scenarios—like a housing crash—it’s reasonable to expect that things will eventually turn around. All you have to do is hold on until they do. After all, investing in buy-and-holds to use as rental properties means that you, and your potential financial gain, are in it for the long haul.
- Tax breaks: The tax breaks available to landlords are another excellent reason to consider holding rental property. For example, you may be able to deduct the mortgage interest and other fees associated with your loan, as well as many of the costs to maintain and run the property. This is particularly good news since real estate insurance, renovation costs, travel expenses, legal fees, and other expenses could otherwise shrink your profit margin. You may even be able to deduct the property’s normal wear-and-tear, also known as depreciation. Of course, you’ll want to check with your accountant for the complete list of investment property tax deductions that apply to your situation. But, because it can help to pad your pockets at every year’s end, it can be worth it to do so.
In my book, the potential advantages of being a landlord outweigh the potential disadvantages. But I’ve also been able to make the most out of being a landlord because I know where to find the best places to buy rental property and how to get a hold of some great deals. In terms of making sure you benefit your bottom line by owning rental property, improving this part of your investment strategy should come first and foremost. But I’ll get to that further down.
Should You Continue Being a Landlord?
Though Margaret is considering becoming a landlord for the first time, I also receive a lot of questions from investors who already own a rental property but are considering jumping ship and selling. These folks have been knocked around a few times by inconsiderate tenants or expensive and unexpected repairs. Others feel cautious about the rental market after several volatile economic years and want to know if it’s time to switch to a short-term investment strategy like house flipping.
Of course, I don’t know your current situation, so I can’t tell you with certainty whether it’s still worth it to be a landlord. However, based on the behavior of the housing markets in most of the U.S., I believe rental properties are still a great investment strategy as long as you have the time and money to spend. Though mortgage interest rates are still relatively low, prices are higher than average and still rising. Since it costs more to buy a house, the potential ROI for flips is shrinking. However, if you own a rental property, you’re both generating a passive income AND increasing your equity. That’s why I think it’s still worth it to be a landlord in the current real estate market.
Being a Landlord Is Worth It? If You Have the Right Tools and Support
Ultimately, the key to making the most out of being a landlord is knowing how to spot good leads on investment property, where to find reliable tenants, and when it’s time to sell. As a long-time investor with a wide range of experiences, I’ve found a good way to do just that.
As an independently owned and operated HomeVestors® franchisee, I have access to some of the industry’s best real estate lead generation tools. That includes the nationally-recognized “We Buy Ugly Houses®” marketing campaign, which has motivated sellers to reach out to me with great deals on potential rental properties. As a new franchisee, you’ll also benefit from a comprehensive training program and the one-on-one mentorship of a HomeVestors development agent. With HomeVestors, you can confidently invest in a rental property with the support of a national network of franchisees behind you.
Is being a landlord worth it? Yes—if you’re a HomeVestors franchisee! Reach out today to learn more about becoming an independently owned and operated HomeVestors franchise.
Each franchise office is independently owned and operated.