Pros and Cons of Being a Landlord
By Paul Fussell for achievementszone.com
Today, many people are considering being a landlord. To some, it doesn’t make sense to sell so they are looking to convert their current home to a rental. Others are looking to take advantage of unprecedented opportunities in the market (low rates, low home prices and increasing rents) by purchasing a rental property.
Either way, people need to make a thorough examination of the pros and cons before making any decisions, which are listed below.
1) The tenant will make your mortgage payment for you! After a while, the loan’s principal reduction adds up, and you are building equity, meaning more profit at the time of sale.
2) Gives you the opportunity to take tax deductions for interest expense and depreciation (the other side of this is that you have to pay capital gains tax on any gains).
3) Inflation can work for you. Despite popular belief, in some cases inflation can actually be a benefit to you; and owning rental property is one of those cases. The rent you receive generally increases with inflation. However, your mortgage, which in most cases in your biggest expense, remains the same. This results in cash flow that increases the longer you own your property.
4) Your investment can provide steady income. In most cases, this income is not much in the beginning, but as we just discussed, this can grow to be substantial in the future.
5) Being a landlord doesn’t need to take up much of your time. After your initial effort of finding the right tenant is over, there’s not much more to do (assuming you get a good tenant and your property does not require constant repair).
Cons (aka risks)
There are also some risks involved with becoming a landlord. Maybe the most well known of all is the story of the nightmare tenant who can’t or won’t pay and ends up being evicted. If you carefully screen your tenant, the hopefully this won’t happen to you. Below is a list of some other risks of being a landlord that you should consider. One thing that’s important to note, is that by being aware of these risks you can take actions to help you avoid them. Next to each con, I’ve detailed ways to do this.
1) Can’t find a renter. This was probably my biggest concern when I decided to become a landlord. This is a worrisome situation that can quickly drain your savings account.
You can avoid this by: Know the market and be reasonable about your rent. There’s strong demand in most markets for a decent property charging reasonable rents.
2) Will I lose money: Becoming a landlord requires substantial investment; not only will you will need to put down a payment on the property, you will also you will be responsible for the mortgage.
You can avoid this by: Make a detailed cash flow statement considering several factors will improve your chances of making a profit.
3) Having trouble with your tenant. This is may be the most well known risk of being a landlord. A tenant who is regularly late on the rent and who causes damage to the property could lead to eviction if not held in check. This is bad for everybody.
You can avoid this by: Screening your tenant carefully, get a full background check (this includes credit, criminal, employment and rental history). Also, BE SELECTIVE. (tip: make sure you don’t discriminate, set guidelines before you start the screening process and hold everyone to those same standards).
4) Unexpected expenses: At some point, your rental property will need repair; as with any home.
You can avoid this by: There’s really not much you can do to prevent these unexpected expenses. What you can do is prepare for them by setting up a reserve fund from the cash flow of your property.
5) Risks of legal issues: There are laws that landlords need to follow.
You can avoid this by: Know applicable laws, exercise common sense and don’t discriminate.