Does the idea of extra income from a fairly flexible source appeal to you? Becoming a landlord can be an excellent way to tap into an extra or full-time revenue stream, but there are many challenges to consider before committing. The number of renter households in the U.S. grew by 9 million between 2005 and 2015—which is the highest decade-long growth since 1965, as Investopedia cites based off of a Harvard study. Demand is only expected to climb moving forward, so it makes sense to starting thinking about the upsides and downsides of becoming a landlord now before making any moves.
Choosing the Right Property
Chances are you’ve seen a television show in passing that features hosts taking a chance on a “fixer upper,” renovating it, and flipping it for a cushy profit margin. While these programs are entertaining, the reality of finding the right property and making it safe, legal, and appealing to tenants entails a lot more elbow grease. When you’re shopping for the right property to get you started, these factors are the bare minimum to consider:
-Average rent for area
-Condition of property
Location Affects Risk and Returns
Purchasing and renting out a house in a cutthroat market like San Francisco or New York City is going to look a lot different from becoming a landlord in Topeka. Markets will hugely affect your potential earnings across time. Calculate the capitalization rate, or the expected annual rental income divided by the purchase price. Locations with higher “cap rates” usually fetch higher returns, but also ramp up risk as well. Figure out how location, volume, and competition interact before jumping into any particular market, or you may end up underwhelmed by the returns on your hard work.
Finding and Working with Tenants
Being a landlord includes many facets, but it’s primarily a people-focused business. Are you equipped to respond if a tenant starts refusing to pay rent? Do you enjoy building positive relationships with people face to face or remotely, or would you find it draining? Can you deal with pest problems, appliance repairs, and noise complaints in an efficient manner? If a tenant violates the terms of their lease, do you know how to act? When you’re a landlord, no two days are the same. Whom you rent to and how you structure your workflow will make or break how you negotiate the unique demands of this job.
Renting to the right people will cut down on potential chaos and conflict, so screening possible tenants is an absolute must. Trulia recommends performing background and credit checks, as well as meeting for an in-person interview and collecting references from employers or previous landlords.
Invest Your Time and Energy
Successful landlords don’t just invest a chunk of money into their properties; they pour in time and energy, possibly at the expense of other aspects of their lives. As one New York-based landlord told CBS, “People need to understand that this is a business, not a hobby. You need to take it seriously. The people who make it a hobby usually run into problems because it’s not their top priority.”
Landlords don’t need to handle everything on their own. Many choose to work with property management to streamline all the little things that contribute to landlord stress and over-commitment, like finding tenants, handling paperwork, addressing maintenance requests, and more.
Know Local, State, and Federal Laws
Regulations at every level dictate what landlords can and can’t do, and violations can land you in serious hot water. Read up on laws and regulations in your area, and get a reputable attorney involved before drafting up any legal paperwork. According to Zillow, you’ll need a “clear understanding of your landlord rights and responsibilities, tenant rights, and the basic workings of specific notices and eviction procedures.”
Becoming a landlord is a great way to bring in income while maintaining flexibility and independence, but it’s important to do your homework beforehand to get a feel for the challenges as well as the potential payoffs.