Becoming a landlord is a great way to earn some additional cash flow when you really need it, such as if you plan to retire early or send your kids through college. However, it’s not a step to take lightly, and it’s important to research it thoroughly before jumping in headfirst. After all, purchasing additional property is a huge investment that will keep a large chunk of your money tied up until you decide to sell.
For two years, my husband and I became landlords almost overnight. Right when the housing market began to crash, we bought a new house before we sold our old one, and that was not an ideal situation to be in. Looking back, we should have stayed in our old house rather than becoming the owners of two properties at once, but hindsight is 20/20. The problem was that we had no idea what we were getting ourselves into due to our lack of research.
Becoming a landlord is a great way to diversify your income as long as you approach it with appropriate preparation and plenty of reserves to back you up. It’s also important to realize that it’s not exactly passive income since a lot of work goes into it. Here’s how to tell if you are ready to be a landlord.
Hire a Property Manager or Be Your Own Landlord?
Being a landlord is a lot of work. It means that if something goes wrong with your house, you are the one who gets to fix the problem, no matter the time of the day. If you don’t want to be the one who has to deal with a busted pipe in the middle of the night, then you may want to look at hiring a property manager. They will charge a fee for their services, but you may find that it’s worth it to you to not have to deal with last minute repairs and problems with renters, especially if your property is in another state.
Property managers can do everything from finding and screening potential tenants to collecting monthly rent to finding someone to fix repairs. Ultimately, you will still be financially responsible for the upkeep of your house, but a property manager can help smooth out the process if you are unavailable to manage problems at a moment’s notice. While it is spending money to make money it’s a valid question to consider before taking the leap.
Finding your own tenants isn’t as easy as posting a listing on Craigslist. If you go that route, your phone will probably blow up with inquiries from renters who aren’t exactly the cream of the crop. (At least that was our experience.) If you do opt to find your own tenants, plan to screen them before they move in. You don’t want to find out the hard way that your tenant has a bad history of paying their bills.
Require potential tenants to complete a detailed application, provide past landlord references and a current employer for you to contact, and sign a written authorization giving you permission to verify this information. Once you verify their income and credit report, you will have a pretty good idea if your new renter will be able to pay the rent on time. However, if they are unwilling to provide this information, you can be sure to steer clear and keep looking.
Maintain Cash Reserves
I cannot stress enough how important it is to maintain a separate account for reserves set aside solely for your investment property, particularly if you have a mortgage on it. Not only are you responsible for the mortgage payment on your property, whether you currently have tenants or not, but you are also responsible for taxes, insurance, maintenance, and repairs, many of which need to be immediately remedied. You can accomplish this in a variety of ways, but some form of savings account (checking is just as fine) with ready cash.
It is important to make sure you can continue to make the payments on your property if you don’t have a tenant for a few months. If you can’t afford to have enough cash in reserves for your property, then you need to reconsider becoming a landlord.
Rentals Aren’t Exactly Passive Income
The bottom line is that renting out property can be a great income producer, provided you are ready for the work and responsibility. But due to all the work that goes into it, it can’t truly be considered passive income. By finding and screening tenants, working on repairs and general maintenance in your free time, and dealing with other unforeseen problems such as renters who don’t hold up their end of the lease, you are still working for your money, so keep that in mind as you consider if being a landlord is right for you.
What are some other things you think need to be considered before becoming a landlord? Do you currently invest in real estate? If you do, how do you balance the responsibilities?