Interest rates are at record lows, which often leads people to think about investing in real estate. That could mean you flip a property, or on the other hand, you might think about buying something and renting it out.
Being a landlord can be a great financial opportunity, but it comes with serious responsibilities.
There are examples of landlords even being held responsible for injuries and deaths that occur in their properties. For example, according to personal injury attorneys Jacoby & Meyers, they handled a recent case with a $4.2 million dollar settlement for an infant burned in a building. The building owner was held responsible because of unsafe conditions.
Even beyond the more extreme situations, being a landlord day-to-day can come with challenges.
If you’re thinking of taking the plunge, consider the following as you determine if you’re ready.
Do You Have a Property In Mind?
Finding a good deal isn’t the only thing you should think about when you invest in real estate.
You also need to think about whether the home will need improvements. How much will those improvements cost? Are the upgrades primarily aesthetic, or will you need to make some repairs for livability as well?
What is the location like? Location is one of the main determinants of how much you can charge in rent, and you need to think about not only what the average rent price is in the area for comparable properties, but also whether or not there are a lot of other vacant properties.
How close is the property to your home? You may need to go over in the middle of the night to fix something or deal with an emergency and even outside of those unexpected situations, you’ll need to be at the property fairly often unless you want to pay a management company.
Can You Afford a Vacancy?
Having your rental property sit vacant is not ideal, but is always possible.
You have to be financially prepared for this.
You should have anywhere from three to six months of anticipated rent set aside as a reserve to cover vacancies and the costs that come with them. Otherwise, you could have to go through a foreclosure.
Can You Invest Not Only Money But Also Time?
There is a high likelihood that if you’re thinking about becoming a landlord, you’re underestimating the time investment it’s going to require.
If your tenant needs a repair made, they’re not going to be willing to wait. That means you’re going to have to either do it yourself or pay someone to do it. It’s also going to have to happen quickly.
If you have a full-time job, you need to ensure you have the money set aside to pay someone to deal with repairs that arise.
Other responsibilities you need to have time for as a landlord include qualifying tenants, giving property tours, managing financial records, dealing with evictions, and collecting rent checks.
Some landlords do hire property management companies to do this for them, but there’s usually a fee of anywhere from 8 to 10% of the monthly rent.
Are the Numbers Going to Work Out?
If you’re a new landlord, your only goal might be to have enough rent to cover the mortgage of the property, but if that’s how you look at it, you’ll probably lose money.
The mortgage is one of many factors that come with renting a property.
Before you can say you’re ready to be a landlord, you have to make sure you know what the other costs are going to be.
For example, maintenance, repairs, capital expenditures, and insurance are all things you may have to pay as a landlord.
There’s one rule that some landlords follow called the 50% rule. Under this rule, your mortgage including only the principal and interest should be no more than 50% of your estimated rental income.
Will Being a Landlord Be Problematic For Your Retirement Goals?
If you’re pretty far off from potential retirement, this isn’t as big an issue, but if you’re closer, you have to think about whether or not you might have to move money that would otherwise be in your retirement savings.
Finally, being a landlord requires patience and the ability to deal with people. You may be faced with disgruntled tenants and challenging interpersonal interactions. You have to be fair but reasonable, even in the face of frustration. Are you prepared to handle these difficult situations as they arise when you’re a landlord?