If you have the option, owning assets that produce income is a better financial strategy than owning assets that generate expenses. If you own a house or apartment for your own residence, for example, you need to pay for maintenance, repairs, taxes, mortgage interest, landscaping, utilities, or a homeowner association fee that covers some of these expenses. If, however, you own a house or apartment available for renting or lease, you can generate income with the property, and in some cases, end up with positive cash flow after all those expenses are paid for.
Being a landlord is a viable vocation; after all, landlords exist for every rental tenant, and they often thrive financially. Sasha, a former writer for Consumerism Commentary, owns several properties. She shared tips for buying a rental property for prospective landlords based on her own experiences.
Succeeding in the business of rental properties requires a certain set of skills and desires, and making a living isn’t always as easy as others would lead you to believe. If you want to earn a living, for example the equivalent of a $50,000 salary, you’ll need to profit more than $4,000 per month. That’s a lot of pressure. Consider these questions and tips before you decide to get into the rental property business to determine if you have what it takes to be a landlord.
Do you like “doing it yourself?”
If you’re a handy person who likes doing your own work around the house — light plumbing, perhaps some construction, yard work, and so on — you might be a good candidate for becoming a landlord. If you’re just starting out, it may be too expensive to handle outside contractors if you expect to turn your rental income into profit. Doing the work yourself saves money.
Do you know the right people?
If you plan to expand your property portfolio beyond one or two locations — and if you want to earn a living, you’ll likely need to expand quickly — you’ll reach a point where you can’t handle all the work yourself. You’ll need to call in trusted contractors, and if you have personal relationships with contractors, you’re in a better position to negotiate discounts and enhance your overall profit. These relationships take time to build, and it takes time to find the best people to hire for the work. If you’re able to begin your adventure as a landlord with these relationships already formed, then you’ll be in a much better position.
The same is true about real estate agents. If you have connections in this business, you will have better access to potential tenants, reducing your advertising costs. Word of mouth is incredibly important, and knowing agents can remove some obstacles before you even get started.
Can you handle the 24-hour responsibilities?
Hiring a company to manage your properties is an expense that cuts into your profit. Depending on the location, you may be able to afford this from just your rental income. If that’s the case, work with a property management company who will answer the phone at any hour to fix any household problems that arise. Otherwise, be prepared for calls in the middle of the night. If you’re starting your adventure with rental properties while working at another job, you will find yourself with competing priorities often.
Do you like dealing with people?
Some tenants can be difficult, and in most states, tenants have legal rights that level the playing field in disputes. If you’re able to screen tenants well and have a choice of potential residents, you can carefully choose who will be living in your house or apartment. If, however, you need to fill a vacancy to prevent losing money every month and there aren’t enough tenants interested in the property, you may have to accept a tenant you might not like to prevent negative cash flow.
Even if you believe you’ve chosen well, dealing with strangers is not for everyone. Tenants will certainly not care for your property as much as you would if you were to live there. Even nice people can surprise you in a tenant/landlord relationship. To become a landlord with a successful business, you’ll need to be able to deal with people who might be different than you in terms of values and personality.
Do you have cash and savings to buy the properties?
The great thing about buying a house with cash rather than seeking a mortgage is that you can eliminate the expense of the mortgage payments. Every cent of rental income you receive, after maintenance expenses are paid, is profit. That can make the difference between a rental property business that succeeds and one that struggles.
Leveraging your property purchase by using other people’s money — a mortgage — can turn out to be profitable when property values increase, but that’s not guaranteed. Loans open up the possibility of becoming a landlord to more people, easing the affordability of properties. Having the cash to buy the property outright is not necessary, but if you have the money and are willing to invest in your own business, it will be much easier to generate a positive cash flow.
Can you charge high enough rent to cover your expenses?
In some locations, monthly rental properties are very competitive. That can drive down prices, decreasing your profit. If you’re competing in an area where most investors own their properties outright without a mortgage while you do have mortgage expenses to contend with, you have less pricing flexibility than your competitors have. You need to charge high enough rent to cover your expenses and take home a profit.
With mortgage payments to contend with and a tough competition, you may only be able to profit $200 to $400 per month on a property. That’s $4,800 a year, a far cry from the $50,000 we’re talking about for earning a living. You’d need to own over 10 properties profiting $400 per month in order to reach that target. With volume, you may be able to increase that per-property profit due to economy of scale, buying materials in broke, and receiving significant discounts from contractors. You might be able to reach the annual income target faster, but it will still take a long time to reach the number of units necessary. Use this mortgage calculator to assist in determining how much profit you might generate.
In other locations, though, you can charge much higher rent compared to the purchase price or mortgage payment. Property prices still tend to be high in New Jersey where I live, so potential for profit isn’t as great. Head to other areas of the country, and you can buy properties that command rental fees of $1,000 or more for just over six figures. If your monthly mortgage payment is $350 and the rent you can successfully charge is $1,000, your path to earning a living of $50,000 annually just got much clearer and shorter. With some time and volume, you could easily exceed this.
How much work are you willing to do for an extra $400 a month?
Work at the beginning may pay off when you add additional properties, but the path to millionaire status through rental properties is not as simple as television shows on HGTV might lead to to believe. You may profit in terms of your financial statements, but if you consider your time and your sweat equity worth something, the calculation gets a little trickier, particularly when you’re doing more work to get started.
Even in markets were home prices have remained relatively high, it’s possible to earn a living with rental properties. The work isn’t for everyone, and that’s good; those who are willing to put the necessary labor into creating a successful business will be rewarded. Earning a living isn’t as easy as being a landlord for one property, however.
Are you earning a living through rental properties? What lessons have you learned? If you’ve considered becoming a landlord but have decided against it, what held you back?
Photo: Charleston’s TheDigitel
Updated August 21, 2012 and originally published July 27, 2012. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.