Being a landlord can be highly lucrative and incredibly rewarding. It can also drive you crazy sometimes! So before you decide if investing in rental properties is the right move for you, it’s a good idea to weigh the pros and cons of being a landlord.
This article will break down the good, the bad, and the ugly of owning and managing residential rentals. We’ll also show you how to get most of the benefits of being a landlord without actually having to be one!
The Benefits of Being a Landlord
There’s a lot to like about being a landlord. Here are some of the biggest advantages to owning and managing rental properties.
Passive Income Potential
Rental payments can create a steady passive income for landlords every month. Once the mortgage and related property expenses (including insurance, taxes, and maintenance) are paid, the profit is yours to pocket.
The passive income may be limited while paying the mortgage, but once you own the building free and clear, your monthly cash flows skyrocket!
Long-Term Wealth Building
Properties typically appreciate in value over time, increasing your equity and your net worth. These real estate assets can usually be sold for a profit in the future or even passed along to your children or grandchildren to create generational wealth.
During periods of inflation, when savings are being devalued because it takes more money to maintain purchasing power, real estate serves as a buffer, helping protect the value of your investments.
Rental income and property values typically rise with inflation. At the same time, if you have a fixed-rate mortgage, your principal and interest payments remain flat. Your property taxes, insurance premiums, and maintenance expenses may increase with inflation, but this could be more than offset by the increase in rental rates.
This is particularly important during retirement, when seniors on a fixed income are more vulnerable to increases in the rate of inflation.
Control Over Your Investment
Unlike stocks or mutual funds, real estate offers direct control. You can decide how to use and manage the property (within local regulations and federal laws). You get to screen for qualified tenants, set rental rates, and choose when and how to upgrade.
You can even decide to outsource the day-to-day operations of the property to a professional property manager if you don’t want to be the primary point of contact for tenants or handle small maintenance issues on your own.
The Downside of Being a Landlord
Despite the many pros of being a landlord, there are a few potential cons to be aware of as well.
High Upfront and Ongoing Costs
Buying a rental property requires a significant financial investment.
You’ll have upfront costs:
The down payment. Lenders often require 20-30% for investment properties.
Closing costs. The costs to facilitate the transfer typically run 2-6% of the purchase price.
Buyer’s agent fees. Since 2024, buyers have been responsible for their own agent’s fees per the NAR settlement. However, you may be able to negotiate a seller concession to cover this expense.
Make-ready expenses. If the property isn’t turnkey, you may need to invest more in getting the unit ready to bring to market.
Marketing expenses. If the property is vacant, you may incur fees to market the property to prospective renters.
And you’ll have ongoing costs:
PITI. Principal, interest, taxes, and insurance.
Maintenance. Regular upkeep and common repairs as needed.
Reserves. It’s smart to set aside some of each month’s rental income for the inevitable large expenses (renovations, new roofing, HVAC repair, etc) of property ownership.
Vacancy Losses. There is usually a little downtime between tenants when the property is vacant and not generating income.
Tenant Management Headaches
You might have wonderful tenants! Or you might have renters who make your life more difficult. Late rent payments, disputes with the neighbors, and property damage can all create stress and conflict.
In extreme cases, you may even need to evict someone or offer cash for keys (when you pay the tenant to leave).
Legal and Regulatory Challenges
Landlords have to navigate fair housing laws and local ordinances. These regulations can be complex and are subject to change at any time. Staying up-to-date and compliant can be time-consuming and draining. You may even need to hire an attorney to provide legal counsel at some point as a landlord.
Property Vacancies
Empty units mean zero rental income. However, your ongoing costs like mortgage payments, insurance, taxes, and even utilities continue. So it’s important for landlords to be ready to cover these expenses out of pocket until the new tenant can be moved in and rental income can start flowing again.
Time and Energy Demands.
Managing a rental property includes many varied tasks, such as:
Collecting rents
Addressing maintenance issues
Screening new tenants
Drafting leases
Handling move-ins and move-outs
Calculating fair rental rates
Keeping tenants happy
Renewing leases
Processing deposit refunds
Tracking income and expenses for tax purposes
Even if you hire a property manager to handle the day-to-day on your behalf, you’ll still be involved as needed with tasks like approving charges and signing off on new tenants.
Many new landlords are surprised to learn how much time, attention, decision-making, and effort are required as a property owner.
Additional Considerations for Becoming a Landlord
Before becoming a landlord, you should also consider a few factors that are neither inherently good nor bad, but are important to understand.
Responsibility to maintain the property. Whether you DIY repairs or hire professionals, you'll need to keep the property up to a livable standard.
You’ll need a wide range of knowledge. From local market trends and marketing to maintenance and landlord/tenant law, you’ll need to know a lot and continuously learn as new situations or regulatory changes arise.
Hiring a property manager cuts into your profits. While you can hire a property manager to make your investment more passive, property managers are paid a percentage of the monthly rents collected, which reduces your returns.
Long-term commitment. Rental properties are typically considered an illiquid investment because they can take a while to sell and have comparatively high transfer costs.
Location dependence. Your property’s location heavily influences rent rates, tenant pool, property appreciation, and local regulations. While you can account for location when buying the property, changes to local conditions may be outside your control after the purchase.
How to Get Many of the Benefits of Being a Landlord Without Actually Being One
If you want all the financial benefits of being a landlord, but you’re not sure about the responsibility, hassle, and time required to actually manage your rental property, consider investment models that let you reap the rewards without actually being a landlord.
With Gatsby, you can select the syndication project(s) you want to invest in, and Gatsby will handle every aspect of the deal from acquiring a suitable property to finding qualified renters and disbursing proceeds to the investors.
Join the thousands of investors who trust Gatsby and enjoy the benefits of being a landlord without the hassle or stress that typically come with the job!
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