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The Truth about Being a Landlord

Tuesday, January 19, 2010 posted by Tommi Crow

      The real estate crash has created new interest about property management and the work involved in becoming a landlord.  Some people feel they have been cornered into the landlord role, because they have been unable to unload property they already own.  Others are considering buying and renting property as an investment, since home prices and money are cheap.

Before you consider investing your savings in real estate, ask yourself why you’re doing so.  Do you think that landlords get rich off rental income?  Do you expect home prices to suddenly rebound?  Do you expect to flip your investment for big profit, like some did 4 or 5 years ago??  If this is what you’re thinking, you might need to think again. 

Myth #1: Real Estate can Make You Rich:  We’ve all heard the late night commercials and multi-level marketing groups that make their money by selling the keys to making riches in real estate.  Don’t buy into it.  Unless you’ve owned a property for many years, or you found the deal of a lifetime, you should know that rarely does the rental income cover expenses.  In other words, rental property will cost you money, not make it.  When the market was soaring higher, landlords could justify losing money every year on rent, because they saw their property values grow.  In 2010, it will be very difficult to make renting a profitable venture.

Myth #2:  Rents Above Base Costs = Profit:  Calculating potential profit from rentals is not at all that simple.  An investor needs to be sure to calculate all the real expenses of owning property. 

Hidden Expenses.  If you have a loan, you’ll pay interest so figure that in.  Property taxes on real estate are already high and expected to go higher.  If future tax increases exceed the probability of rent increases, you lose even more.  Landlords also need a personal liability insurance umbrella, in addition to insurance coverage for the structure itself.   Landlords should count on having a one month vacancy (no renter) per year, as leases expire.  In addition, you’ll need to budget for the advertising, signage, etc needed to attract a new tenant.  Don’t forget to add in the cost of accounting and filing tax returns on rental properties. 

Don’t forget about Repairs and Maintenance.  They will vary depending on the age and condition of the property, but even if you buy brand new, the best tenants will cause normal wear and tear.  In addition, all property needs to be updated and maintained regularly.  If you don’t have the skills or the time, budget in repair costs plus the labor. 

Utilities and ground care can also eat away at potential earnings.  If the property is separately metered, the tenant pays the utilities.  If not, the landlord pays.  Unless the property is a single family home, the landlord will always pay for sewer and water, at a minimum.

Myth #3:  The Cost of Opportunity:  The Costs of Lost opportunity to be more precise.  If you invest your savings in a piece of rental property, then you can’t invest it in stocks, bonds or other financial instruments.   It is important for investors to know what their money can earn, in order to decide the best place to put their cash.   And, remember that real estate is not liquid, like equities and other investments.  You can’t dump a bad real estate investment, or cash in your profits, with a call or click of your mouse, like you can other investment vehicles.  Remember that just to sell a piece of investment property can take months or years, and fee’s to sell will generally erase 10-12 percent of the sales price.

Myth #4:  Fat Cat Landlords Sit While Cash Rolls in:  Being a landlord may look like a “cushie” job, but nothing could be further from the truth.  Landlords are responsible to their tenants and the law.  Owning any property, even one you occupy, requires constant attention and upkeep.   Unless you own over 10 units, you probably can’t justify the cost of a property manager to oversee finding and screening tenants, enforcement of leases, collecting and accounting for monthly rentals or handling evictions.  In addition, all landlords should be willing to accept late night phone calls or vacation interuptions for flooding, broken down heat or AC, leaking roofs, etc.  If that scene doesn’t sound appealing to you, or you’re not very handy, then becoming a landlord probably isn’t a job you will like.   

Conclusion:  Real estate is a high maintenance investment vehicle.   It is also one that is very expensive and time consuming to get rid of, if you don’t like it.   So, if you are considering becoming a landlord for any reason, make sure you calculate all the costs, time and trouble, before you jump in.

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