Before my husband found his first house, he looked at several multi-family properties, thinking that renting out the extra apartment would be a great additional source of income.
As the resident killjoy, I pointed out to him that becoming a landlord, with the associated necessary maintenance work, would be very difficult with his 60 hour a week job plus 45 mile commute. I was also very concerned about him finding quality tenants and dealing with the necessary paperwork.
Since that time, I’ve often wondered if I gave him bad advice. Renting property is a (somewhat) recession-proof method of maintaining income, and a good way of building equity in a home you’re not ready or able to sell.
However, being a landlord is not for everyone. Here are some of the things you can expect from becoming a modern-day Mr. Roper:
1. You’re not going to retire on this (at least not right away).
On average, landlords make $2,000 in profit per year per unit. If you are simply trying to hold onto a property until the housing market takes off, then it may not matter to you that you have little (or no) money to show for taking in tenants. But if you are trying to generate extra income through your rental property, be prepared to have your profit margin be fairly lean.
2. Don’t plan on having 12 months of rental income every year.
Even if your property is in a highly desirable area, transition time between tenants can take one to two months or longer. The average nationwide vacancy rate of rental properties is 10%, although different areas of the country may vary widely. So unless you have a long-term tenant for many years, factor in some vacancy time to your rental income calculations.
3. You’re eligible for tax deductions.
One of the benefits of being a landlord is that Uncle Sam allows you to make some relatively significant tax deductions. These include interest on mortgage or Home Equity Loans, as well as interest on any credit cards used to purchase rental-related goods or services; depreciation of the property; repairs on the property; travel expenses related to rental activity (this is especially important for landlords who live in a different city or state from their properties); and home office expenses.
4. Make sure you have the proper documents.
Before you take the plunge, do a little homework on the landlord/tenant laws in your state. You want to know ahead of time exactly what you are responsible for in any possible tenant situation. From there, draw up a lease agreement that fits within the scope of your state’s laws — and also spells out exactly what you and the tenant are each responsible for.
5. Research potential tenants.
One of the hardest aspects of becoming a landlord is finding and keeping good tenants. It may be tempting to rent to friends or family, but that could lead to soured relationships. Instead, find tenants through Craigslist, community bulletin boards or word of mouth, and then make sure that you ask for references from previous landlords and do your homework.
Becoming a landlord can be a good solution for a difficult housing market, but you need to make sure you enter into it with your eyes wide open.
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Real estate is where the $ gUaP $ is! 🙂