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A question that will come up from time to time during client meetings is whether owning rental property makes sense. My position on being a landlord is that it can be great for some people but a disaster for others. As Ross Schmidt, a fellow financial advisor, put it, ‘real estate has created the most millionaires but also has led to the most bankruptcies’.
What are some prerequisites you need to be successful as a landlord?
- Time. While rental property has often been labeled a passive investment, make no mistake about it, being a landlord is time consuming. In fact, the property types that have the highest income such as apartments and short-term vacation rentals often require the biggest time commitment. Do you have enough time to be a landlord? Are you an attorney or physician who is paid by the hour at a high hourly rate? If so, you’ll probably make more money by working at your day job than being a landlord.
- Callousness. This is going to sound harsh, but chances are that at some point as a landlord, you’ll have a tenant that can’t make their rent on time and will ask you to accept a late payment or some other sort of modified payment plan. How will you react? The profitability of your rental enterprise depends on having tenants who pay their rent on time. If you’re like me and a pushover for any sob story it can create the expectation on the tenant’s part that paying their rent is an optional activity. The best landlords are those who make it clear that paying the rent in full and on time is a requirement of living in the property.
- A plan. Just like any type of investing, there are many roads to success with rental real estate. How many properties do you want to own? How much risk do you want to take? What type of property? Where will they be located at? Who will manage them? Will you make your money by the property appreciating or by throwing off cash flow every month? While you don’t need to have the answers to all of these questions carved in stone, you do need to think about these types of questions and have an idea of what you want to accomplish and how you’re going to accomplish it.
- Liquidity. Even though it’s relatively easy to finance single family residential rental houses, you will still need money to cover things such as repairs and vacancies. This liquidity should be over and above any emergency funds that you carry for your personal finances. At a minimum, you should have two months of expenses (mortgage payment plus utilities) in the bank for each property that you own. This minimum should also go up along with the number of properties you own. While improbable, it is possible to own ten rental properties and have them all be vacant at once.
- Management and organization skills. At the risk of sounding obvious, you need to be organized and have good management skills to be a successful landlord. There are a million little details that you need to keep track of for both business and tax purposes. If you have more than one rental property, you also need to be able to identify potential economies of scale. An example of this is to use the same paint color and carpet in all of your rental properties – not only will it simplify your life but you can potentially buy in bulk.
If you own rental property, what do you think leads to being a successful landlord? Share your thoughts in the comments below.