We all would like a little passive income on the side. With property prices on the decline, it’s real tempting to go out there and acquire an extra property or two and rent them out. These days, there’s a lot of condos and town homes on the market that will cash flow from day one - if you manage it properly. Go back and read the last five words in that sentence - “if you manage it properly.” Rental real estate is not a passive investment - you have to be on top of it. While rental income can create a fantastic stream of money over time, before you take the plunge, read these 8 points. They may convince you that becoming a landlord isn't for you.
1. Squeezing Time Out of Your Busy Schedule
Before you go out hunting for foreclosure - remember that with real estate you don’t just invest money - you invest time. Be prepared to cancel that romantic weekend to clean up after the last tenants, paint the walls and replace the carpet. And don’t schedule anything for the following weekend either because you’ll have to stick around to show it to prospective tenants. The time and energy you spend managing real estate holdings is the real cost you pay for being a landlord.
2. The New Hired Hand - You!
You think it’s a hassle to take care of your yard, well get prepared to be a hired hand. Guess who your tenant just hired to clip his lawn and shovel his snow - you. Tenants can be incredibly demanding of their landlords, and when they want something fixed, they tend to call you at the most inconvenient time - just when you’re dressed up and heading to the annual Holiday Party. If you farm it out, you'll need to manage your worker and it will take out a sizeable chunk of your profits.
3. Sorry We Have No Money
Some renters don’t pay on time and others don’t pay at all. It happens to every landlord. It’s not necessarily a willful act on the part of your renters - sometimes they just don’t have the money. Of course, you can always evict them. If you’re a soft touch and it’s a struggling single mother with two kids who just got laid off, get prepared for a gut check. Chances are, if you’re the decent sort, you’ll let them slide for a few months which costs you lost rental income. You’ll rationalize it as charity - but it is involuntary charity and if you have your own cash flow problems, you’ll have to evict them and that means the Sheriff shows up and tosses the mom, the kids and their toys on the pavement. Either way you lose. The kids will never forgive you and you’ll never forgive yourself.
4.They Know the Law
Some renters are pros at stiffing their landlords. They have the money but they also know how to work the system. Depending on which state you live in, the law can really tilt in favor of the tenant. If you want to get them evicted you have to serve them an eviction notice which means you have to track them down. If they don’t answer the door, you can’t serve them. If they hide at a friend’s house or the local bar and come home at midnight, you’ll have to be there waiting in the car. And if they know your car, they’ll be watching out for you. To avoid these artful dodgers remember two phrases ‘credit check’ and 'reference check.'
That’s probably the one factor most people don’t take into consideration. If you have to relocate to another city and leave your rental property for somebody else to manage - you’ll find that your positive cash flow property goes negative cash flow in a New York minute. Professional management by a real estate agent can cost an arm and a leg. And you’ll definitely have to hire help to do a lot of the maintenance work you used to do.
6. Another Money Pit
It’s not only your fifteen year roof that starts leaking on its fifth birthday. That huge sucking sound happens with rentals too. Be prepared to double your emergency funds for dealing with major repairs. Seriously, the first year your smiling because you have such wonderful cash flow. The second year you have 5 repairs to make and the third year you get a major renovation. Things break and you'll rapidly suspect that your tenants just take lousy care of everything. Either way, you're responsible.
7. Complaints - From Their Neighbor
Your tenant’s neighbor will have an earful every time you show up on the property. If your tenant doesn’t get along with the guy next door, you’ll hear about it early and often - from both parties. The fact is that your tenants may be wonderful cash flow for you but your neighbor is forever pissed off that you somehow picked the worst possible renters. Take a counseling course or learn to be a mediator before you have to sign up for expensive therapy sessions.
Rental real estate is not illiquid but it might as well be. It can take a year or more to sell in certain markets. And you’ll have to sell the house with the tenant in it. Don’t expect a bonus for the tenants or their kids. Chances are the only buyer will be a sharp real estate investor on the hunt for a great deal. Owner-occupied homes fetch a premium and are easier to show. Your tenant won’t feel obliged to bake cookies or hold open houses for prospective buyers. He might even set the dogs on them. Tenants can be very territorial that way.
Rental real estate can pave a path of roses to a nice retirement nest egg but you might end up spending your golden years in an insane asylum. If you are considering becoming a landlord, you might want to check out these articles:
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