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Why You Should Consider Becoming a Landlord

Written by Hank Coleman - 15 Comments

Why You Should Consider Becoming a Landlord

My job is requiring me to move to a new town. So, my wife and I are faced with what seems to recently be the newest typical American family dilemma. What should we do with the home that we bought almost four years ago? While it can be hard to figure out whether to buy or rent a home in the first place, homeowners can face a similar struggle when it is time to move.

Should you sell your house and possibly take a loss? Or, should you consider becoming a landlord, with all of the potential dangers that also entails? There is not always an easy, cut-and-dried answer to this question. Here are a few things to consider whether to sell or rent out your home.

Why selling may not be a great idea

I happen to live in an area of the country that hasn’t suffered as much as other regions during the housing crisis. While new mortgages may be hard to come by and builders have drastically slowed their new home construction projects, home values in my area of the southeast have remained flat. While this stability has been nice, it means that home prices have not appreciated, either.

In fact, you can still purchase the same home model down the street from us for the same price we paid for our home. You may consider that a great thing since we should be able to sell our home for the exact price we bought it. While this is true, it does not consider that we are currently still in a buyer’s market.

Buyers currently have the upper hand in real estate deals. They can demand that the sellers make additional repairs, cover all closing costs, reduce their asking price, etc. If a seller tries to stick to his guns and not negotiate enough, the buyer can simply go down the street and find a more willing seller to bargain with.

There are so many homes on the market, and home sellers are doing everything in their power to keep buyers happy. So, in my case, while I most likely would not lose money on the asking price for my home, I could lose thousands of dollars in extra demands buyers almost certainly will make in closing costs and extra repairs essentially eroding the down payment I made four years ago and most of the equity that I have built up.

Why we chose to become landlords

I’ve always dreamed of investing in real estate. Becoming a landlord allows my family and me to continue growing our net worth as our renter helps us pay down our mortgage each month. Not only is our rental income a positive cash flow stream of income for my family, but eventually our home mortgage will be paid off and the entire rental income will a passive stream of income for us.

This payoff point is set to occur right at the same time we will most likely retire. Another great benefit of becoming a landlord instead of selling our home is that we will continue to enjoy many tax benefits of being a homeowner. As a landlord, you can deduct items from your income taxes associated with the rental property such as mortgage interest, depreciation, the cost of repairs, insurance, property manager’s fees, and many other costs that you face.

The benefits of a property manager

My wife and I chose to use the service of a property management company to help us find tenants, advertise our home, screen tenants and run credit checks, handle any repairs, take care of evictions, and be responsible for the day-to-day operation of being a landlord. For us it makes complete sense since we will not actually be in the same city that our home is located in and cannot come back to make repairs or show the home to new potential tenants.

We interviewed three separate property management firms and also received recommendations from friends and coworkers before deciding on which firm to use. A property manger may not be the way to go for every new landlord. There are some costs involved with hiring a property management firm. Most charge a fee of 10% or more of your monthly rent. Other firms also charge a fee for advertising your home each time it is vacant, and some also require you to keep a maintenance fund with them in order to expedite minor repairs that may need to be made.

Whether or not you chose to use a property manager, it can be well worth your time and energy to sit down and evaluate the costs and benefits of their services.

Owning rental real estate is a great way to continue building wealth even through tough economic times. This isn’t the best direction for everyone, but it can work out very well in certain cases. You’ll have to take a hard look at your own family’s financial goals and weigh them against the cost of choosing one outcome over another.

Have you weighed the costs and benefits of becoming a landlord vs. selling your home? What did you decide? And what were the key factors that you considered?

Published on March 29th, 2012
Modified on April 1st, 2012 - 15 Comments
Filed under: Mortgages, Real Estate, Saving & Investing

About the author: is a freelance writer who has written extensively for many financial websites and publications. Hank holds a Master's Degree in Finance and is actively pursuing Certified Financial Planner status.

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15 Responses to “Why You Should Consider Becoming a Landlord”

  1. 1
    Nickel Says:

    We briefly considered this when we moved just under six years ago. However, we were moving quite a distance away and weren’t interested in dealing with this sort of thing from afar. On top of that, we’re still friends with our old neighbors and decided that we didn’t want to stick them with renters next door. Oh, and it didn’t hurt that this was in the summer of 2006 when the market was still screaming hot and we were able to sell at a large profit.

  2. 2
    The Frugallery Says:

    I think you’ll be happy to be using a management company. I have relatives that tried doing this on their own and they spent so much time dealing with the property. They might have come ahead on paper, but considering time spent they were not breaking even! This will make it much smoother for you!

  3. 3
    Tenant Screening Says:

    Becoming a landlord would be a better idea even if you have to take small pains because in long run you can have an additional source of income and may be you grow you business more. Landlords although need to be cautious while keeping tenants in their properties. They should either hire a tenant verification service or should consult a property management company for this.

  4. 4
    Long Says:

    Where I live, rental income wouldn’t be a positive cash flow stream. Fair rent is far below average monthly mortgage payments, so owners would end up dumping more money into their homes if they chose to rent. It really does explain a lot about the rate of foreclosures and short sales though.

    From people I know that do have income properties, they all highly endorse using property management groups. Having been through the experience of managing the rents themselves, they say the biggest value of having a property manager is the screening/credit check process.

  5. 5
    pollyanna Says:

    I am trying to understand why I don’t get any tax benefit from my rental property. Its not cash flow positive – basically its net zero – but for tax purposes I have $30K in accumulated losses which don’t offset my earnings. Am I in too high a tax bracket or something. My additional concern is that the property value has fallen – so now I don’t even expect to be able to capture those losses when I sell.

    Question two – I could refi the place for a monthly savings of $200 – but it would extend the loan if I keep the 30 year term. I’m 44. I struggle with the philosophy of having a place paid off vs. continuing to leverage. What’s your position? Keep the current loan term and current payment to be paid off in 20, refi for 20 (though costs of refi would take 3 years to recoup with only $100 a month savings) or refi to 30 and save $200 a month now…

    Thanks

  6. 6
    Squeezer @Personal Finance Success Says:

    Does the property manager help you with permits? One of the suburbs next to me requires a $10,000 bond from landlords that wish to rent out their house. Another city has an ordinance that any house that is is getting new renters requires a $25 inspection fee.

  7. 7
    don Says:

    Being a landlord is harder than it seems. After helping a disabled relative with his 3-flat over the last three years, no thanks. Making a profit is harder than it seems, as many things go wrong or need to be upgraded with an older property.

  8. 8
    Steve Says:

    I have owned a rental property and managed another for a number of years. I have been disappointed in management companies. They will not give the property the attention that you as owner will. Typically, they will be happy to rent to the first person to come along, and be less discerning than you might be as to repairs. By way of example, I took over management of a friend’s family duplex from a management company. I found that they rented one unit to 2 females, who then proceeded to move in their boyfriends and another friend, and now we had 5 people, 3 that we did not know living in the duplex, and the noise was disturbing a couple who rented the other side.
    In addition, I found that they were using a propane heater to save on their gas bill and a waterbed on the 2nd floor–both not good idea in a old house. The management company did not object or even know about these things, because they never visited the residence.
    Being a landlord can be beneficial, but it can be another job. Bad tenants abound, but by picking my own, I had good luck. If you do not have a spare amount of cash for repairs, or to carry you over for vacancies, being a landlord is not for you. I rarely rented to Section 8 tenants as it usually turned out badly, in terms of damage to the property, drama due to others in the tenant’s life, or other factors.

  9. 9
    Ryan Says:

    This is an idea I’ve been tinkering around with for the last few months. I live overseas, but I’ll be back in America in 18-24 months. I want to buy a property while the market is still depressed. I’ve saved up enough for a down payment, and I was thinking about buying one now and renting it out until I return to the US. I suppose I would have no choice but to hire a management company, and there’s the risk that my tenants trash the place before I get back, then I’m moving into a dump that I OWN.

    The other thing I considered is buying a short sale or a bank owned property closer to the time that I return. There are some very cheap one and two bedroom flats in good Chicago neighborhoods; loan payments would be less than $500 a month in some cases. I could live super-cheap for 6-8 months, fix the place up, then buy my real home and rent out the old one for $1000. In fact, the mortgage is so cheap that I could effectively pay it off in 2-3 years.
    I considered doing this continually, i.e. buying cheap flat, living there, rent it out, but another cheap flat, live there, buy another, etc. etc. until I get to 6-7 properties producing a steady $5000+ monthly income. Then I would move into my awesome and permanent home.

    Does anyone have any experience with this, or general opinions about the idea? Do you think it’s worth the investment? Or should I buy my ideal home, pay a little more every month, and not worry about the hassle of renting out?

  10. 10
    MoneySmartGuides Says:

    I just entered the world of rental real estate. I decided to keep my house and rent it out vs. selling it. In my case, my house is underwater, but not by much. The rental market is strong in my area, so I had many possible renters. I think I found a good one. She will move in next month. I’m excited about the experience. I decided against using a property manager since I am close to my house and it won’t be too much of a hassle when I get the call in the middle of the night.

  11. 11
    Seth Says:

    I did the same thing with my first home, and have been renting it out for about 7 years now. One piece of advice I will pass along is this… make sure you are charging a decent bit more in rent than you pay on the mortgage. In addition to the property management fees (which you said were often 10%), you will have repairs (I just spent quite a few thousand on a new AC unit), and unless you are extraordinarily lucky, there will occasionally be periods of vacancy between renters in which you will still be paying the mortgage. In the past, I have read that a good rule of thumb is to charge at least 20% more for rent than your mortgage, taxes, and insurance costs.

  12. 12
    John Says:

    There is no such thing as a free lunch. Being a landlord is a job, and being a good landlord takes work. It’s only easy money if your property is really new, because of decreased maintenance costs, or if you decide to be a slum landlord.
    Renting should be considered a long-term investment, especially if your property requires a lot of maintenance up front and/or if you don’t know how to do maintenance yourself.

  13. 13
    Home Owner Says:

    We were not able to sell our home in North Carolina before moving overseas for my husband’s job and left it with a property management company. It has been a nightmare. The company advertises about their attention to detail, but their attention has only been on getting the money and not on our property. They have taken more than the fees the contract allows, they sold our washing machine to one of the company’s employees then charged us to move it, they failed to do a pre-move in video to document the condition of the home or to do a move in inspection with the tenants as promised, we still don’t have schedule E or 1099 forms that are correct, they won’t answer email (we are 13 hours ahead making phone calls difficult). If I had it to do over again, I’d sell our house for much less than it is worth to avoid all these problems.

  14. 14
    Bill Says:

    There are pros and cons both ways when it comes to deciding to rent out your previous residence.
    There ends up being emotional attachment to the property ( a definite no-no for experienced landlords) and the possibility of not being educated enough if you jump into being a landlord without doing the necessary homework.
    You definitely need to know the local laws regarding renting properties as several of the commenters have mentioned. Some districts are anti landlord and this can open up a world of expensive fees and headaches.
    You did do one of the best things possible by interviewing multiple property managers. Again as a commenter mentioned, property managers typically don’t treat the property with the same attention to detail you would, especially if it was your former home.

    Bill

  15. 15
    Glendale Real Estate Says:

    Being a landlord can be extremely challenging and you have to be suited to handle the crisis and responsibilities that come along with it. It is definitely not an easy task to take on and can be fraught with a number of frustrations. Had a great time. Thanks.

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