If you’re a fan of home improvement or real estate reality TV shows, you may have thought about becoming a landlord yourself. But, it’s important to know exactly what you’re getting into before you buy your first rental property.
Investing in a single-family rental home is not a sprint. It’s a marathon in building long-term wealth. If you buy a house in a nice or up-and-coming area, the returns will be attractive over time and can contribute to your investment portfolio. But being a landlord has its ups and downs.
Here’s the rundown on what it’s like managing a rental property:
PROS
Income
Real estate is a way of making passive income where money is earned regularly through minimal activity and requires little daily effort from the recipient. Specifically, the IRS states passive income is earned from rental property or “trade or business activities in which you don’t materially participate,” such as REITS, stock dividends and mutual funds.
Having steady income every month from tenants (when paid on time) is what draws a lot of people into becoming a landlord. You’ll receive enough money to cover the mortgage and other expenses, allowing you to hold onto the property as it gains value.
Tax deductions
All rental income a landlord receives is taxable, but this also means being eligible for tax benefits. You can deduct depreciation costs, insurance and property management expenses such as:
- Cleaning and gardening
- Accounting and professional services
- Repainting and replacing damaged furniture
- Replacing water pipes and disposal duct
Long term security
Ideally, your rental property is appreciating in value over time. The money you earn and save can help achieve financial goals, such as early retirement, paying for your children’s college education or even buying more real estate.
CONS
Start-up and fluctuating costs
Initial costs of ownership can be expensive. Coupled with costs for renovations and installing new amenities and security features, you’re looking at a hefty size of cash to get this project off the ground. Additionally, banks have tightened lending standards in recent years, requiring at least a 20 percent down payment.
You must also be aware of variables such as rising property taxes and fluctuating insurance costs. Unexpected maintenance repairs and the possibility of long vacancies can also interrupt income streams. Be sure to plan for the unexpected.
Time and maintenance
Being a landlord requires more energy and resources than being able to sit back and earn passive income. It takes work. Tenant problems are your responsibility at any hour of the day, all year long.
You’ll receive a call if there’s a broken pipe, parking dispute, secret pets, noise complaint or a security issue. You’re responsible for routine and emergency maintenance work, late rent payments and possibly eviction of a tenant. There are also the repairs that must be done after a tenant leaves, which may include replacing broken windows and doors, appliances and even the carpet.
Some of this can be alleviated if you hire a property manager to collect rent, handle tenant disputes and maintenance requests. But, you’ll still want to contribute money to an emergency fund for unexpected repairs and hire the right property manager for your needs.
In summary, rental properties requires active management.
Taxes on income
Although we listed some tax deductions for rental property, the IRS still taxes all of your rental income. You have to pay quarterly taxes and keep meticulous records of both income and expenses.
Your money is locked in
Rental property is a long-term investment. Not only are there startup costs, there are costs associated with selling the property as well. There’s the commission for the agent, utilities to keep the water and lights on, staging and repairs. Plus, you’ll more than likely have to add a prorated interested you’ve accrued to the total balance if you haven’t paid off the mortgage. This is not the project to be thinking in the short term.
Legal Issues
There are regulations and property laws you must adhere to as a landlord. It’s important to hire legal counsel or become an expert on the issues by taking a class.
Few landlords know how much an eviction costs until they have to go through the process. If you reach the point where you must remove a tenant, expect to spend a lot of time and money sorting things out. It starts with serving legal notices and filing motions in court to waiting months before your court date, all while you’re not receiving any income from the tenant. Potential costs include: lost rent, attorney fees, court costs, sheriff, repairs and cleaning fees.
On the surface, it seems like being a landlord is an easy way to make passive income. But, it can be a complex and time-consuming job. The good news is that you don’t have to be a landlord to benefit from ownership. At Quinlan MacKay, we offer a pipeline of off-market, Class A real estate projects with a great return on investment and no active management. Make investment easy and enjoyable.