Given the option, owning assets that produce income is a much better financial strategy than owning assets that generate expenses.
If you own a house or apartment for your own residence, for example, you have a lot of expenses. You will need to pay for maintenance, repairs, taxes, mortgage interest, landscaping, and utilities. Or you may pay a homeowner association fee that covers some of these expenses. If, however, you own a house or apartment that is available for rent or lease, you can generate income with the property. In some cases, you can even end up with positive cash flow after you pay the expenses.
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 jumping into the rental property business. That way you can determine whether 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, you may be unable to afford outside contractors while still turning a profit. Doing the work yourself saves money.
Do you know the right people?
Do you plan to expand your property portfolio beyond one or two locations? (If you want to earn a living, you’ll likely need to expand quickly.) Well, you’ll soon reach a point where you can’t handle all the work yourself.
You’ll need to call in trusted contractors to handle repairs quickly and thoroughly. 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, 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. You may hear of new deals coming to market before the sign is even out in the yard. 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 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 that will answer the phone at all hours to fix any problems that arise.
Otherwise, if you’ll be DIY-ing the management, be prepared for calls in the middle of the night from tenants for problems big and small. 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; there’s no way around it. In most states, tenants also 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 in order 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 well as you would. 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 from 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 with a mortgage, is that you can eliminate the expense of the mortgage payments. Every cent of rental income you receive (after maintenance expenses) 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. If you have the money and are willing to invest in your own business, though, 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 have mortgage expenses to contend with, you have less pricing flexibility than your competitors. You need to charge high enough rent to cover your expenses, while still hoping to take home a profit.
With mortgage payments to contend with and potential 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, each profiting $400 per month, in order to reach that target.
Related: Using the 1% Rule to Determine If a Rental Property Is a Good Investment
Sure, once you own multiple properties, you may also be able to increase that per-property profit due to economies of scale — buying materials in bulk 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, though, and you’ll see a different story. There, you can buy properties commanding rental fees of $1,000 or more, for purchase prices of just over six figures. Let’s say your monthly mortgage payment is $450 and you can successfully charge $1,100 in rent. Well, your path to earning a living just got much clearer and shorter.
How much work are you willing to do for an extra $400 a month?
The initial hard work may pay off when you add additional properties to your portfolio. However, the path to millionaire status through rental properties is not as simple as television shows on HGTV might lead you 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. This is particularly true when you’re doing more work to get started.
Learn More: Fixer Upper: What I Learned from Flipping My First House
Even in markets where home prices have remained relatively high, it’s still possible to earn a living with rental properties. The work isn’t for everyone, and that’s a good thing. Those who are willing to put the necessary labor into creating a successful business will be rewarded. While you can bring in extra cash from a sole property, earning a true living isn’t that easy. If you want to create a passive income that can support your family, you’ll need to expand and add some volume to your rental property portfolio.
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?
Updated May 27, 2017 and originally published May 22, 2017.
{ 23 comments… read them below or add one }
I think you are right—–you have to like doing your own repairs, painting, etc. Everyone I know that does this thinks it is a great idea in the beginning and then can’t wait to unload the properties in the end. And selling these properties is subject to market conditions, just like the stock market.
I think the key to making being a landlord tolerable is thoroughly and properly screening tenant applicants. One bad tenant can soak up enormous amounts of time, make a landlord’s life miserable, and wipe out modest positive cash flow. One tip: Visit tenant applicants at their home to see how and where they’re living now before taking them on.
I do this.
A couple comments.
Buying with cash is nice but unless you have a million in spare cash laying around you can’t really get to a size that could give you livable income without loans.
Also there is a hump that you need to get over. If you only have 1 or 2, its kind of a hobby. It doesn’t bring in much extra money. It’s a hassle that is always there and you ask yourself if it is worth it. But there is a point at which you start to see it multiplying and you can see how this could really turn into something much more substantial. This number might be different for different people but I would say somewhere around 5 properties is when you might start to see the potential.
I have been doing this for 4 years and have 10 properties that are on average leveraged about 75% each. I manage them all myself and only call in contractors for things like furnace, A/C, etc. I cash flow about 70K per year and have net income of about 75-80K per year off of those 10 (the difference is principal paydown). If there is any appreciation that is on top.
I do this all while working a full time job as a software manager.
I intend to continue to expand this until I can transition to it but I won’t do so until the cash flow from it vastly exceeds my income so as to give me a big safety cushion and enough extra cash to continue to grow the business.
I figure I need a few more years and about 25 properties to get there.
I also agree with Kurt that tenant screening is hugely important. Initial property selection and location as far as the type of tenants you are likely to attract is also important. Tenants are the key. If you have bad tenants you will hate this. I have generally pretty good tenants and I actually love it.
There are times when I hate something I have to do but that is always the case in any job. I love building my own business. I love making investment decisions. I love scouting for new opportunities. And I actually love it when I help out a tenant with an issue and they are appreciative. Honestly, I get more satisfaction out of doing this than I do in my day job by far.
I’m a landlord and my father has owned rentals for >30 years. This is a good list. You really do need to have the right skills and disposition to be a landlord. People need to be aware that its a job as much as anything and that the finances are not as simple as cashing a rent check and paying a mortgage. You have to be aware of all the bills and expenses, account for vacancies and losses and have a cash fund to handle emergency broken pipes or such. And like Kurt mentioned, good screening of tenants is a key factor in your success. Another very important aspect is buying the right property for the right price. You need to get a good price for the property, it has to be suitable for a rental and you should certainly look for a good neighborhood. Knowing the local market is key too. Real estate and rental markets differ greatly across the country so what works in one city may not apply in another.
It should also be emphasized that rental properties are not a ‘get rich quick’ system. You have to be in it for the long haul.
I would say though that if you do want to do rentals then right now may be a very good time to get into it. Mortgage rates are extremely low and can make rental investments particularly good deal right now. Plus theres lots of foreclosures on the market that can be bought for good discount and rented after a little work.
Many years ago, when I achieved financial freedom I did it with income property. Apartment buildings and a shopping center did it for me! I am not sure if it takes special skills, but you should treat it as a business. It requires all the skills you need to operate a business successfully.
This is something i’d like to get into down the road. Not to that point but this will make a good reference when that time comes.
I was considering buying the property next door but it needed a lot of work and I didn’t want to put the capital in it to have a couple hundred a month cash flow (maybe). I’d also be going in on it with my parents and didn’t want the added stress of working with family. Eventually I’ll be renting out property whether it be the place I live now or my future house that we might by in advance to rent out until we’re ready to move into it. Time will tell.
Becoming a landlord is one of the few time tested sure ways to invest… as long as you realize it’s not a passive investment. If you think of it as a low-intensity side job, it’s perfect.
There is another key: DO NOT buy houses at the top of the market. House prices go up and down. The only time to buy is when prices are at the low end of the cycle. That way, if you ever need to sell, for whatever reason, you’re covered.
Being neither handyman nor much of a people person, I’ve opted out on this one. I’ll take what I can get on other investment opportunities. :)
Why would anybody do their own tenant screening, evictions, and handywork? That’s crazy. I’ve been a absentee landlord for years (I’m Canadian and I own rentals in Phoenix, AZ) and I employ a property management company. In the 3 years I haven’t had to lift up anything heavier than my phone. The profit is crazy as well since Phoenix, AZ was hard hit during the meltdown.
“Why would anybody do their own tenant screening, evictions, and handywork?”
Because in many cases is considerably cheaper and easy enough to do that stuff yourself.
As an long distance landlord its not practical for you. But if you lived in Phoenix then you might find that doing some of the work yourself is a good way to maximize your profits. For example, property managers want $500-$1000 typically to fill a vacancy. I can do that myself in a few hours and save hundreds. My dad does all his own handywork and 1 hour work and a $1 part can save him a $100-$200 service call. Likewise most evictions never happen if you do good tenant screening and then 90% of the time just the threat of a 3 day notice is enough. You shouldn’t need to evict folks much, but if you do I would hire a lawyer to do a real eviction.
Of course you can’t do everything yourself if you have many units, but for a few rentals its practical to fix an occasional leaky faucet or fill an occasional vacancy.
“Eddie’s been looking in my mailbox.” That is an email I received from one of my 55 year old tenants regarding another 55 year old tenant. I replied, “Tell him if he does it again he’ll get a time-out.” A landlord for ten years, I have three units. Sometimes even responsible tenants act like children and bug me with silly emails.
Last year I decided to invest in real estate because the stock market has gone nowhere for over ten years. I wanted my IRA account to grow so I converted it to a Self Directed IRA and paid cash for a small foreclosure that I put some money into and decided to flip instead of taking on the risk of becoming a landlord. I’ll be closing the sale of the house this week, netting a profit of about 15% in ten months time.
Overall, it’s been a good experience and I will be looking for another foreclosure as soon as this sale is closed. I think right now is a good time for real estate investing because prices are finally leveling out or rising in most area. However, it does take commitment, time, and money to get the job done. Having some good home improvement skills is also a help.
I definitely don’t recommend getting deep into debt to do something like this as it could really bite you in the butt if you overextend yourself financially.
I have been running a rental company with about 25 tenants. Not a lot but there is still headaches. I have the personality for it and it doesn’t bother me one way or another. But one of the companies owners goes nuts whenever something goes wrong or a tenant is behind in rent. With the same circumstances I am calm and he is crazy. I have a vested interest in the company so I do profit when the company does. It’s a perfect fit for me but not for him.
How long do you let rent be late before it starts to weigh on you? Late rent irritates me as well, because the tenant is essentially forcing me, an acquaintance, to make a personal loan to them to cover their rent until they get it to me. Any other landlords, please chime in!
I have been too lax in the past and let one go way too long — although fortunately it did have a happy outcome eventually. I have now promised myself to start the eviction process (3-day notice) 10 days after rent was due.
I have been a lax landlord. I have not provided the tenant with receipts after receiving the check. The tenant has been behind in their rent for over a year. What to do now?
Are you saying that they are late every month over the past year, or that they owe you 12 months worth of rent?
I firmly stick to the 5 day rule.
If rent is due on the 1st, I give a 5 day grace period, after which rent is late. On the 6th day I post a 5 day notice – demand for rent and late fee; after which an attorney is contacted to start eviction proceedings.
If not outlined in lease, or followed through on, you can be stuck with no rent for 6 months. That’s how long it takes to remove a non-payer, along with the costs of eviction. But better promptly, not procrastinating for possible bad feelings, which just adds to the problem.
Prompt payment of rent is the reason to have a lease.
And that really is the important point – there are investment options out there, and you have to go with what fits your style. Some people stress when the stock market goes down, but I’ve found I can ride through the dips, because I’ve learned the market never goes up or down in a straight line. So that’s where I end up doing most investing…
I have been a renter for years, so I don’t know what it is like to be on the other end of the equation, but I would also say, don’t be a landlord if you don’t plan to take care of the property. We were never late on our rent for 10 years with our last landlord, and still, he couldn’t fix anything. We had huge potholes in our parking space and a bucket under the sink catching drips and holding the pipe in place, but he wouldn’t be bothered to repair it.
This is something that I really want to get into in the future, but I’ve always been faced with the last question you asked: how much work am I willing to do for an extra $x per month? I’m still on the fence on just purchasing a REIT on a stock exchange and getting property exposure that way.The return from leverage when property prices are rising is hard to beat, though!
I think building the relationships with realtors and property managers is extremely important. Anyone can tell you what you want to hear. I worked on relationships for almost two years before finding the right people to help with the transition into being a landlord. We now have one commercial property and our newly acquired first residential rental property. We hope to be up to five properties within the next ten years. I think it can replace our income when we decide to drop out of the 9-5 grind.Time will tell.
I think these are all great things to think about if someone is interested in becoming a landlord. I especially appreciate your mention of the financial responsibilities that come with owning rental property. So many times people underestimate how costly it can be to invest in a rental property and maintain it, even while collecting a monthly rent from tenants. I would love to add however, that even for those that do not want to manage their rentals on their own, it is still possible. Using an experienced property management company that has great customer service, knowledge of the real estate industry, and low monthly management fees can make things a lot easier, and still give you enough supplemental income to make it worth it. Thanks again for sharing!