Yes, the rumor is spot-on. Being a landlord is no fun at all. There are endless sources of troubles, such as …
- bad tenants: those who do not pay rent on time, or even worse, who trash your house.
- contractors: good contractors are hard to come by. Their schedules are always full, and matching their schedule with your tenant can be a daunting job.
- insurance companies: they are particularly picky on rentals.
- city/county/state regulation on rentals and building code: these regulations can change at anytime, and you have only one choice which is to comply.
- neighbors of your rentals: in general, people do not like rentals next to their homes.
- a new set of tax code: even if you outsource your tax, you should still know the tax code so that you can review your tax return. After all, you are ultimately responsible for everything on your tax form.
Before committing to be a landlord, ask yourself the followings.
#1 Does your potential rental actually have a positive cash flow?
My accountant once said, “oh you are doing pretty well, as you are actually making money out of your house”. Surprisingly, a lot of landlords are putting money into their rentals every month to keep it going!! This is particularly true in the case of condos due to the high condo fee. Do not fool yourself that you’re having a sound investment if your rental does not produce a positive cash flow unless you have strong conviction that your rental will be appreciated at a very good pace in the next couple of years. Your house can have many things going wrong as you can’t possibly imagine. That involves not only financial resources, but also your time. So ask yourself, is your rental really worth your time and financial resources? Can you actually come out ahead by investing in an index fund?
#2 Will you self-manage the property or outsource that to the property management?
You can hire property management company / real estate agent to manage the property. I did not because of the hefty 5 – 10% management fee. If you plan to purchase multiple properties, it’s best that you get your hands dirty to the nuts and bolts of managing tenants and building relationship with contractors to fix your house.
To ease the stress of self-management, there are things you can do before your tenants move in to avoid the potential endless phone calls from your tenants:
- properly inspect your property and fix the issues
- deal with all the county/city/state rental requirements, i.e. rental license, lead paint inspection if any
- carefully screen your tenants. A good credit score can only tell so much. Meet your potential tenant and get a feel of how decent this person is. My agent somehow has good intuition, so I always ask him to screen tenants for me.
- spell out tenant’s responsibilities clearly in the contract, i.e. lawn maintenance.
Rest assured. Most tenants are reasonable human beings. They usually do not call you in the middle of the nights. Think about it; they are also afraid running into a slumlord. So treat them nicely, and in general, they will do the same to you and your property.
#3 Do you have an emergency fund for renovations and repairs in the house?
As a landlord, you will run into fixing houses a lot more than you may expect. Do not rely on the number of times you have to fix something at your home as the guideline on how often your tenant will call you. Fixing houses is not cheap. The rentals I have are built in the 1960s era. They are solidly built compared to a lot of new houses these days. However, since they are old houses, and the maintenance were somewhat neglected during the time the houses were foreclosed or under short sale, so in the past couple years, I did a lot of repairs and renovations.
Here is a brief summary of what I have done in the last couple years.
- New water heater and HVAC system. The water heater runs about $1,000 each and the whole new HVAC system is at $5,000.
- My rental had sewage backup issue to the basement. I got a plumber to snake it twice, and each snake costed $400 to $500. Eventually, it was determined that the sewage pipe somehow was broken up in the middle of the front yard, and hence the sewage backed up to the house. The pipe was buried 15 ft below. This whole project set me back another $5,500.
- A total renovation of a basement was $20,000.
- I also installed new windows and put on a new roof.
- Cutting down dying trees was expensive too.
- Other miscellaneous issues, i.e. replacing thermostat, changing carpets and appliances.
To summarize, BE PREPARED.
The Final Verdict
A lot of people look at rentals with a pair of rose-colored glasses. Wow, you are having income without doing much every month. Yes, there is an income. But, the without doing much part may not be true all the time. There can be a lot work in managing the rental. Don’t get me wrong. Financially, it can be a sound and great investment, and it is a great diversification in your financial portfolio. But the nuts and bolts dealing with the on-going management can be daunting and challenging. Run the numbers and make sure that you have a good idea on the potential return as well as the various repairs that may come with your rental. Then, you can finally answer the question: is it worth it to be a landlord?