Do you dream of retiring early on rental income?
I did, and still do, at least as one source of passive income among many. But before you dial your real estate agent or make an offer on Roofstock, you need to know exactly what you’re getting yourself into.
Because being a landlord isn’t the cushy gig that the average cynic assumes.
11 Issues with Becoming a Landlord
People love to hate landlords. But beside providing a needed service, landlords put up with more than their share of headaches and hassles.
You should fully understand these challenges before committing tens of thousands of dollars toward a down payment and closing costs.
1. Investing Capital
The best understood of the challenges involved in being a landlord is that it takes cash to buy investment properties. A lot of cash.
According to the Federal Reserve, the median home price in the second quarter of 2021 was $374,900. Even if you borrowed 80% of that, you’d still need to cough up roughly $75,000 for the 20% down payment. And that says nothing of the thousands of dollars in closing costs you’d incur, any update or renovation costs, plus the carrying costs for the first couple months while you clean up and advertise the property for rent.
You can’t even assume that a turnkey or move-in ready property doesn’t need any modifications. Your state’s landlord and tenant laws might require that you add safety features to the property before you advertise for tenants. They may also require you to register the property as a rental, pay fees, or get inspections — and then you can only pray your inspector doesn’t just nitpick punch-out items in order to prove to their supervisor that they hit every house on their schedule. (I’ve seen that happen, and more often than not.)
Word to the wise: Keep a deep cash cushion for unexpected expenses when you buy a rental property.
2. “Surprise” Costs and Negative Cash Flow
After you place a tenant in the property, you can kick back, collect rent, and get rich, right?
Hardly. Most novices and laypeople so quick to slander landlords just assume that their cash flow equals the rent minus the mortgage payment. They couldn’t be more wrong.
In the industry, property owners refer to the “50% Rule” — you can expect about half of the rent to go to non-mortgage expenses. Those include vacancy rate, repairs and maintenance, capital improvements, property management costs, insurance, property taxes, accounting and bookkeeping, travel, legal, and other miscellaneous expenses.
Most of those expenses don’t hit you every single month. But this month, it’s a $700 furnace repair. In three months from now, it’s a $200 plumbing leak. In six months from now, it’s an expensive turnover, where you have several months’ vacancy and a series of ugly turnover costs including fresh paint ($2,000) and a deep clean ($400).
New landlords repeatedly tell themselves after each “surprise” cost that their cash flow is going to turn around — that they just got hit with a string of expenses in a row as bad luck. Luck has nothing to do with it. These expenses are the norm, and you have to budget for them as a long-term average when you calculate a property’s cash flow.
That’s a calculation ideally performed before you buy, not after.
3. Rent Collection and Defaults
The fantasy of kicking back and collecting rents falls apart for another reason — not all tenants bother paying them. At least not on time, without repeated coaxing, cajoling, and legal threats.
Don’t assume that just because you always paid your rent on time as a tenant that every other tenant in the world thinks and acts like you do. In some neighborhoods, late rents are the rule, rather than the exception.
Sure, sometimes you’ll have great tenants who pay the rent on time every month. Others will pay on time sometimes, and then there are the tenants that don’t pay and don’t call. Trust me, you won’t enjoy playing the role of bill collector, trying to convince people to do what they should have done in the first place.
Ask yourself if you feel comfortable confronting your tenants before you buy a rental. Even more importantly, ask if you can and will file for eviction on the day the grace period expires, every single time a tenant fails to pay. Then ask yourself the question again, but this time in the face of repeated tears and pleas from tenants begging for “just one more week.”
If you aren’t absolutely confident you will file that eviction every time, then you shouldn’t become a landlord. It’s all too easy to bend when confronted with the tears, because that compassion serves you well in the other facets of your life.
As a landlord, it’s a recipe for being manipulated and losing money. Your mortgage lender won’t be swayed by a teary phone call, nor will your utility companies, your car lender, or any other company providing a service. You need to operate from the same mindset: the implacable machinery of a business running. When you provide a service but don’t get paid for it, you’re the one getting stiffed, not the other way around.
4. Slow, Costly Evictions
Your state’s landlord and tenant laws make evictions seem simple. To start one, you go to the local court, file a notice, schedule a court date, and show up on that date. The judge then tells the tenant to leave. The tenant heads straight back to your property, packs their worldly belongings, cleans the unit thoughtfully, and walks whistling out the door.
The words “fairy tale” come to mind.
In reality, evictions are usually expensive and time consuming. Even if you evict your tenant successfully — far from guaranteed, even if they clearly violated your lease agreement — you can expect months of unpaid rents and utility bills, a messy rental unit, and possibly property damage or legal bills.
First, most states require landlords to provide a grace period before you can even serve a warning notice. If the rent is due on the first day of the month, you can’t even send a threatening letter until after the waiting period of five, 10, or even 30 days depending on your state.
Then you have to sit tight for a second waiting period, again based on your state’s landlord-tenant laws.
After the second waiting period, you can file in court for eviction. Then you wait some more for the court to schedule a hearing date, which takes weeks or months.
At the hearing, the judge may or may not rule in your favor. Many judges give tenants more time as a matter of policy, regardless of the law or the fact that you’re paying for them to live for free. I’ve seen it many times firsthand.
Eventually, a judge signs off on the eviction, and you get approved to schedule the actual eviction date or put-out date. Which takes more weeks or months to schedule.
I’ve had evictions take 11 months before. All while paying the mortgage, insurance, property taxes, maintenance, and other ongoing costs myself.
5. Tenant Damage
It was the 11-month eviction that caused me to sell off all remaining properties in tenant-friendly jurisdictions. In that particular case, the tenant destroyed every cabinet in the kitchen and broke as many floor tiles as they could,
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