Being a landlord may seem like an easy way to make money. Real estate markets seem to suggest that becoming a landlord is a great financial decision. However, certain challenges make this job difficult for everyone.
The Greatest Financial Perks of Being a Landlord
Guaranteed monthly income. Renting out a house provides an added stream of income to the owner. Many people would like to make more money without working a 9-to-5 job. This goal can be easily achieved through the leasing of your rental property.
Passive income is a source of income where you invest and let money stream to you. Once you have the initial capital — for instance, when buying an investment property — you need little to no work from that point forward to make money. It’s the perfect way to make money if you’re currently unemployed or underemployed.
Landlords can potentially earn more passive income through their investment properties than they would have by investing in stocks or certificates of deposit at their bank. In addition, becoming a landlord allows investors to make monthly income instead of just saving money for retirement when prices fluctuate upwards over time.
A high rate of return on investment. Real estate is so popular because of how profitable it can be. You could potentially see a great return on your investment when you decide to work in this sector.
Investing in real estate is, by far, the safest way to grow wealth over time. When you purchase property with the intent to rent it, you can expect at least a 7% (or more) annual ROI.
In addition, as you continue to have the mortgage, you continue to get closer to owning the deed of your property. While it is likely that you will have a significant monthly financial commitment for years, the money is still going toward a long-term investment.
Higher returns for short-term rentals. The pricing for short-term rentals is more flexible. They tend to have higher returns of investments than a long-term rental agreement and can be adjusted variably. The ancillary costs and other operating costs are also included in the rental price when renting short-term properties.
Seasonally aligned accommodations can be rented at varying prices. High investment returns can be achieved in the high season and lead to higher sales through short-term rent.
Long-term profitability. While the property is being rented out, it can be revalued over time. If the real estate market continues to grow, you will be able to sell it at a higher price.
However, if you do not want to sell it, you can increase the rent over time before renewing a lease for more income. You can earn favor when negotiating a higher price for rent if you have favorable market conditions. If the market rates, property taxes, or insurance premiums have increased, or you renovate your property. The more features a home has for future tenants, the higher the rental price can be.
Possibility to own several properties. Once you purchase a property, hire someone to manage it for you, and then find quality tenants, your work is done until you choose to sell or rent out that property again. Tenants will pay their monthly rent, and you’ll receive this without any work.
Your returns on the property become passive income. Imagine enjoying all these benefits from renting several properties at the same time. The more properties you own, the more income you can earn.
Therefore, adding more rental units to your portfolio will bring you higher profits. In addition, it provides diversification of your portfolio. If one of your properties stays vacant for a while, you will still receive passive income from the other units you rent.
If something goes wrong, you will not end up losing all your profit. These properties can be left empty if the cost to maintain them over time outweighs the benefits of having them occupied by tenants or mortgaged out on traditional loans.
Benefit from tax deductions. There are many tax benefits for landlords. You can deduct almost every cost, including:
- The interest that you pay with the mortgage.
- Any depreciation.
- Repairs that you do to the property.
- Insurance premiums that you have on your rental property.
If your home qualifies as a rental property, here are some deductions that landlords can claim:
Interest on mortgages – This includes both the interest that you pay on your loan and any points that were paid when you purchased your home. Interest on most home mortgages is usually simple interest and not compound.
Depreciation – Depreciation is the decrease in the value of the investment. By deducting depreciation, landlords can recover their investment in a rental property over its estimated useful service life under certain terms and conditions. In general terms, depreciation allows owners to create or increase a deductible expense that may otherwise not be available through other means.
Casualty losses – The IRS will allow landlords to deduct repair costs for damage done by earthquakes and even tornadoes. If a natural disaster damages your rental property and it is not covered by insurance (you only need insurance if it’s a business building), then make sure to contact your tax professional right away.
Repair costs – Expenditures made to fix up your home, such as a new roof or fixing a broken heart, can be deducted from taxes.
Insurance premiums – This includes any insurance on the building itself but also includes any equipment in the building, like a heater or a refrigerator.
Financial leverage. For traders, their greatest advantage is to borrow other people’s money in the form of margin accounts. Landlords have the same privilege since they are borrowing real estate from banks by making as little as 20% down payment while the bank finances the balance at attractive interest rates that are tax-deductible.
Overall, landlords attain a leverage effect by obtaining cheap financing on 80-90% of their property values. Rental income can cover almost all costs associated with renting out properties.
Good retirement income. Real estate investments can be very lucrative and successful during your golden years. Though being a landlord is difficult, it is a great way to provide for your retirement years. If you hire a good property manager when you are ready to retire, you can have a steady income for many years with little work. A good alternative includes selling your properties to give you the money that you need to retire.
Owning rental properties doesn’t just provide a good retirement investment. Still, it also allows retirees to live off their earnings while collecting passive income on these investments for years into their retirement. This ensures that even when there isn’t enough money coming in from other sources through work or social security, everyday expenses can be paid off with the investment income from rental properties.
The Biggest Challenges for Landlords
Start-Up Costs. Buying real estate is just the first step in becoming a landlord. Renovations can be just as expensive as the initial cost. Before you purchase a property, estimate how much you’re willing to invest in repairs. Newer properties are typically more costly, but they’ll have newer amenities. Older properties may be cheaper, but they will likely require more renovations to keep them up to date.
Maintenance Costs. Along with initial renovations, you’ll have to make ongoing repairs to your property. There will be:
- Roof leaks.
- Bad plumbing.
- Water damage.
- Safety code requirements.
These problems can take a bite out of your rental check, so it is, therefore, advisable to contribute some of the money to an emergency fund for unexpected repairs.
Tenant Issues. Tenants can be a significant challenge for landlords. If tenants don’t pay their rent on time, or at all, that is money you lose. You also face:
- Property damage.
- Noise complaints
- Other rule violations.
These could lower the value of your property or even force you into expensive legal situations. If they violate your contract, you may have to get a collection agency and lawyers involved to recover your income.
Things to Know Before Becoming a Landlord
Screen tenants carefully – Landlords must always screen their tenants carefully for anything that would indicate unlawful drug use. Looking at watch-lists of known drug abusers and making sure they have not been convicted of any drug-related crimes could help you avoid a bad tenant.
Landlords not only need to thoroughly screen potential tenants but also must take necessary steps upon discovering that the tenant has violated the contract by using or possessing illegal drugs on the rental property. Failure to do so can lead to financial loss, time spent in court trying to evict a tenant who refuses to leave after being asked, and even legal troubles.
Start with one property – There appears to be substantial information on getting started as a landlord or property owner. However, much of learning to be a landlord comes from personal experience. We recommend beginners start by purchasing and managing just one rental property. They will then know and refine their management and ownership process before diving into the world of multiple properties.
While one property may appear minute, there are some great advantages to starting with just one property. You will obtain in-depth experience in taking care of property maintenance and knowing exactly what type of property management service you’ll need to hire for maintaining your rental property when you do eventually purchase additional properties.
Pay attention to your lease – This document defines the responsibilities of both parties including:
- When and how much rent is due.
- Conditions where rent can be raised or lowered.
- Whether or not any non-monetary obligations on either side will be enforced.
Therefore, as a landlord, you must draft a proper and detailed lease to cover both your and the tenant’s responsibilities.
A few examples for details that need consideration include:
- The clause defining the length of the tenancy.
- Clauses defining who is going to pay for heating/electricity/etc.
- How much deposit is required.
- Whether pets are allowed or not.
- Clauses defining the costs for renovations and more.
- Provisions that would warrant an early termination by either party (e.g., non-payment of rent).
- The process by which the tenant can contest any of the landlord’s proposed early termination.
Choose the right moment to buy – As a future landlord, you also need to choose the right moment to buy a rental property.
The state of the economy is important. To be more precise, you need to look out for economic upturns so that your rental properties can bring in more significant revenues. If you buy a property when the market is decreasing, it’s hard to recoup your expenses or yield an income sufficient to repay the mortgage on the property. Since a downward market is usually accompanied by increased unemployment, the rental property will likely have higher expenses versus revenue.
In addition to considering economic conditions, you should choose the right moment to buy a rental property by considering interest rates. In times of high interest rates, mortgages are often hard to get. A promising investment would be renting out a home during low-interest rate periods so that your cash flow can be maximized before it increases again.
Of course, other factors influence real estate purchases, but these two considerations alone should help you choose the right moment to buy a rental property.
Protect yourself with the landlord’s insurance – A landlord’s biggest mistake can be renting a property without having insurance. No matter how rigorous your screen process is, a destructive tenant can still slip past your screening process. In this scenario, being protected with insurance will be your life vest.
Most people will not even consider buying an insurance product until they have experienced some kind of loss in investment. Landlords should make sure that their rental properties are fully covered at the beginning.
We can provide you with a landlord insurance quote in just a few minutes. It’s fast, obligation-free, and you can get your coverage in just a few days.
Renting out your property to someone else is a great way to make money without the hassle of owning a home – from this point of view, being a landlord is worth it.
Your investment in real estate can end up being a very lucrative opportunity for you to expand your business, regardless of the economic climate. The fact that it is one of the most popular markets out there provides plenty of confidence to landlords that deciding to invest in rental properties will be worth your while.
However, it’s also important that you consider all aspects of being a landlord before deciding if this endeavor is worth it for you. As tempting as the financial benefits may be, the job comes with many challenges that not everyone will be capable of managing.
That being said, is it worth being a landlord? The answer depends on you and how much effort you want to spend as a landlord.
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