On Being a Landlord
July 26, 2005 6:02 PM   Subscribe

Is it worth it to be a landlord?

My spouse and I are in a position where we could invest in property. We are looking at purchasing either a second home or a condo locally and renting it out, with the hope of clearing $200/mo. Is this a reasonable expectation? Things to keep in mind: we're intending to have this home available for parent(s) in 8-15 years if they are unable to care for themselves and maybe to our daughter in 18 years (we're gambling in case her disabilities make it impossible to realistically live far from us). From our point of view, it looks like this investment avenue is entirely reasonable and will bring in more per year than market investments over the same time period. If this is the case, why aren't more people landlords?
posted by plinth to Work & Money (16 answers total) 1 user marked this as a favorite
Don't forget to add extra costs like insurance, property taxes and general building maintenance or management fees to the base mortgage payment or what have you before calculating your profit. You're also going to have to support the property between tenants. If you can pay cash for the place (and if so, wow!) then you can reasonably expect to have a little money in your pocket at the end of the month. If the place is mortgaged and rents are low, on the other hand, you may end up supporting it in the short term, and taking your long-term profit as capital gain.

Having said all that, I think property is a very good investment that outperforms most markets in the long term (that is, over thirty years). Why aren't more people landlords? Because the cost of entry is high, at least if you want a fixed mortgage at a decent rate; because the rental market is volatile and good tenants can be hard to find; because you need lots of lovely cash flow if you do end up supporting the property for a while; and because the best way to make a lot of money in real estate is to buy and hold, so it really is a very, very long-term investment.

My impression is that most people are looking for a quicker return - by flipping condos off the plan or investing in biotech stocks.
posted by rdc at 6:15 PM on July 26, 2005

i've thought about it a lot. in my market, it's not feasible, because property values are out of control, but rent is holding steady. i live in a university town, and housing is limited near the university, but huge apartment complexes are being built away from campus that provide a free shuttle service to and from campus. because of this, the housing around campus has to maintain competitive rents to have tenants. people who want to buy near campus however, pay out the nose. we got our house for 180k. two years earlier, the person we bought the house from bought it for 105k. knowing this we still think we got a bargain.

so that's the reason i don't do it. the other reason is that it's a pain in the ass. when i was a kid and we moved to a new house, my dad rented out the old one. the second tenant missed a payment, and gave my dad a sob story, so he cut them some slack. then they missed the next payment, and they had a bigger sob story. cut to three months later, and my dad goes to check on them and they are gone. all their stuff is gone, and the house is trashed. not only did he lose the three months rent, but also had to pay a good deal to fix up the house. he sold it promptly after that.

his friend, who has a lot of rentals, explained to him that he can't have a heart if he's going to do it. for him, if a payment is two weeks late, the eviction process begins. he's gone as far as changing the locks and just putting the tenant's stuff out on the driveway once.

those are horror stories, but there's still the maintainance calls and what not. they try to flush a fistful of paper towels down the toilet and now it's clogged and backed up. they'll call you and say, "the toilets broken". you can hire a property manager for 10% of the rent, but that cuts into your take. most rentals aren't about making a profit from month to month, either. they are cash flow even. rent covers the mortgage payment, property taxes, insurance, and maintainance. the benefit is that you can depreciate a lot of stuff and collect a huge tax break, and also after 15 or 30 years of this depending on your mortgage, you own the house free and clear without a dime out of your pocket.

if you could post more about the condo, it's location, what you think the rent would be, and what kind of tenants you'd expect, we might be able to provide more info.
posted by AaRdVarK at 6:15 PM on July 26, 2005

It is if you screen, screen, screen your tenants! It makes all the difference - a bad tenant can make your life very difficult. There are tenant screening services available online.

My husband and I had a rental house for 2.5 years. We made around $400/month. We did sell it for a nice profit considering we only had it for a short time. $200 sounds a little on the slim side to me but you might be able to pull it off if you are good at fixing things yourself and won't have to hire a repairman.

We were not the best at fixing things ourselves, and it did become a bit of a hassle. We sold it when the tenant moved a couple of months before our daughter was born.

Just a note: The best time to buy property is between Thanksgiving and New Year's. Most people don't put their houses on the market around this time, so the ones that are for sale have been sitting there a while and the seller is more likely to take lowball offers.
posted by Ostara at 6:41 PM on July 26, 2005

I don't think the work of being a landlord is worth $200 a month. My mom's a landlord for about 20 units, and it's a 60-hour-a-week job, not counting the headaches around tax time. I don't think this would scale down to 1 unit; I think a lot of the time spent is on overhead-type tasks.

If you want the property for the purpose of having it appreciate over time, it makes more sense.
posted by ikkyu2 at 7:17 PM on July 26, 2005

I wouldn't do it based on the hope of clearing $200 a month. At least not for a few years. Do it based upon the hope of making a great investment, something that you'll own outright in 30 years and that will be worth 10x as much money as you paid for it. As long as you break even each month, isn't it worth the trouble just for that payoff 30 years down the road?

Now, five years from now when rent in your area appreciates enough, hopefully you'll make $200 (or more) a month off of it. Ten years from you, you'll make $400 a month off of it.

Think about the bigger picture, and don't worry about making money each month for the first couple of years. If you can, then do it, but the big pay day is so much bigger than $2,400 the year you're hoping to get now.
posted by pwb503 at 7:20 PM on July 26, 2005

Renting out a condo can make things even more complicated. Some condo boards actively dislike having renters, and structure their rules to give themselves veto power over prospective tenants, the tenants' pets, and even specific lease provisions. Be sure to read the condo's rules thoroughly before buying, and chat up the other owner-investors so there's no nasty surprises after you're committed. Then make friends with the board and try to attend as many board meetings as possible, so you have early warning of any plans to make the rental environment more restrictive.

Also, as landlord you're responsible for maintenance, but as a condo owner some of that maintenance isn't under your control. That sometimes get awkward, and tenants may or may not be understanding about the limitations on your ability to get quick fixes to exterior problems.

Renting out a condo isn't necessarily harder than renting out a house, but it does add another variable to a highly volatile investment.

Unless you're in a highly competitive rental market with extremely low vacancy rate, it's very tough to pull reliable cashflow from a rental. It's best to assume that returns will only be from equity/appreciation and tax deductions. Net income is a nice bonus when it happens, but put that away for all the other years when the property is running deep in the red. Vacant for a couple months, property tax increase, new roof, termites, new legal requirements to meet, a contested eviction...there's so many ways to get caught unprepared for a big expense.
posted by nakedcodemonkey at 7:54 PM on July 26, 2005

If you want to retire wealthy, you should buy and hold as many properties as you can, especially if you can get 30 yr. fixed mortgage on them.
Most people biggest & sometimes only asset is the equity in their home. What if you had two? How about three? How about 77?
The only thing constant, beside death & taxes, is the saying: I wish I would have bought more.
posted by growabrain at 8:23 PM on July 26, 2005

Banks and investment firms are pretty good at projecting the future need for housing in a given municipality. Do you live in a growth area like Vancouver, or an area like Iowa, where the population is in gradual decline? Can you afford a nice enough place that you don't have to rent to young people. (No offense young people, but parties and inexperience cause a lot of property damage, also finding new tenants is expensive and time consuming).

A lot of it depends on how much you like people. Renters can be a pain. Are you good at letting things wash off your back? My former landlord loves people, and likes being a landlord. I think I might find it pretty hard if I had an irresponsible tenant. Irresponsibility really gets my goat, much more than painting, plunging toilets, and patching plaster.
posted by gesamtkunstwerk at 8:30 PM on July 26, 2005

Everything else has already been covered, but I wanted to add that there's another thing about buying a condo: the assessments. Let's say the condo board wants to build a new pool, and puts a $1500/yr assessment on all of the owners. (And that's low for an assessment...) Poof, you're now down to $75/mo to cover all of the costs of maintenance, etc. I know that my landlady had that happen when I rented a condo in college, my rent suddenly went up $75 one month because she would be losing money otherwise and not just breaking even. The assessment was like $5k/year. Other condo boards have had to assess their members to pay the cost of lawsuits and other surprise building-related costs.

Instead of a condo, you might look at a duplex or something where you don't have the risk of an association and their rules, and have multiple units on the property for the same cost. Nothin' like bein' a slumlord.
posted by SpecialK at 8:37 PM on July 26, 2005

SpecialK is right about condo fees and assessments. Additionally, you should take a very close look at the condo association's financial situation before you buy.

For an established condo association: How much reserve cash do they have? What percentage of owners are fully up-to-date on their fees? Who manages the property and what kind of reputation do they have?

I bought a condo and found out afterwards that our small 54 unit association was practically broke (because the developer declared bankruptcy halfway through a 125 unit build).

For new developments, check the reputation of the builder (see above) and the total financial picture of the association once the build is done. (be very wary of condos with elevators. Locally, these units have their fees increased 3x once the construction is over for 'elevator maintenance')

On a general basis, I can't emphasize screening your prospective renters enough. Using a property manager may cut into your return, but they'll be able to pull credit reports and they'll have all the legally proper paperwork to protect you & your renter.

I had great renters and absolutely horrible ones when I managed a house for a friend. One was charged with attempted murder & running from the FBI (he was long gone before the FBI showed up), another was a Nazi loving weapon hoarding thief who trashed the place.

The bad renters were always a result of the property owner (and me) getting desperate about having the place vacant and taking anyone who looked like they could pay.

If you manage the property yourself, look into having 2 rental agreements. One long term for people with solid rental histories (ALWAYS call the references), and another that's month-to-month for those you aren't quite sure of. Have a lawyer look over both leases to ensure you're complying with local laws.

(the owner I worked for did NOT do this and it got nasty)

You might want to consider keeping the utilities (except phone) in your name and including those costs in the rent. That way you can insure these bills are always paid and you won't have to deal with the mess if renters disappear into the night owing money to you *and* the ulitity companies. Getting those services turned back on when someone owes $ on them can be a hassle.

(keeping the electric in your name can be especially helpful when you realize, as a relative did, that the usage had dramatically increased for no real reason. She found out later that the renter was 'farming' marijuana.)
posted by jaimystery at 5:07 AM on July 27, 2005

Being a landlord was not worth it for me. But I'm a big baby AND obsessive compulsive, so I spent the entire 5 years basically on the verge of a nervous breakdown. You have to have the right personality for this kinda thing.
posted by glenwood at 7:11 AM on July 27, 2005

Where are you?

I am in Victoria, BC and I am a secretary in a property management office. Right now, we are seeing a large number of new rental properties entering our portfolio, as so many people are buying as investments with a very hot real estate market and low interest rates.

However, because it's so attractive to buy, especially in Greater Victoria, more people are buying and fewer are renting. We have a lot of available houses and not a large pool of available tenants.

We're also a university town. We have one one-bedroom condo available now, but about twenty vacant houses. Which means that the property managers have to drop rent rates every week as the properties sit vacant, in order to attract applicants.

When the property sits vacant, the expenses still accrue, as well as ongoing costs of advertising, showing, and screening potential tenants.
posted by Savannah at 7:13 AM on July 27, 2005

how about buying the property but then handing it over to a management company? presumably you earn less, but there are less worries?
posted by andrew cooke at 8:00 AM on July 27, 2005

My mother owns about 20 properties, some in multi-dwelling complexes, some single houses, and I've been managing/landlording all of them for her for about a year now.

When she came into a bit of money when her granparents died in the mid-80s, she immediately started plugging it into some of the more, um, how shall we say this, depressed areas of Houston, Texas, banking on the fact that there is a definite cycle to property values and what was down back then would slowly start to come back up. She paid cash for her initial purchases and immediately started upgrading/renovating; not to "flip" (in the vernacular of our times) but as a serious long-term investment.

And she was right to do so. Property values have been going up, this former "depressed" area is undergoing a rejuvenation, commericial re-development is booming and it's been an interesting process to watch over the last 18 months.

As property manager/landlord--and I'm sure this is only because she owns all the properties outright--I seriously only really work about 10-15 days a month, and most of that time is spent collecting rents, paying bills, and taking care of minor problems. This summer has been extraordinarily hot and dry and about 6 15 year old air conditioners all decided to die within three weeks of each other, and some 20 year old plumbing caused some major problems, but as long as you have established good relations with local businesses that take care of these things, it's really just a matter of paying the bills and calming the tenants down and understanding their frustrations. It's been a lot of money put out this year, but you have to expect these things will happen, but only on the order of about once every 15 to 20 years if you don't buy cheap stuff to begin with.

I also must stress ... screen SCREEN SCREEN your prospective tenants. Meet the entire family if you can. Do a full criminal and credit and prior rental check (many property management companies will do this for a nominal fee for you). To be honest when it comes to the screening process, I'm more concerned about credit and prior rental references than the criminal part as the most any criminal checks have turned up for the tenants I've checked out have been misdemeanors (usually pot ... or bench warrants for failure to show up for a traffic ticket violation). A good tenant is one that will always pay their rent first to keep a roof over their heads, and treat the property as their own. I've only had to evict one tenant thus far, and that was a pain ... especially since he left the house in ATROCIOUS condition that required an almost "extreme makeover" type of renovation. However, even that was an interesting process because I got to unleash my inner interior-designer :-)

Some of my best tenants have approached my mom asking if she'd sell them the property. She has in a few cases, even carrying the note herself (via contract for deed to minimize her risk ... think "rent to own" rather than a traditional mortgage) in most cases. And it's worked out well.

It's a lonely job, though. In past jobs, I've made most of my friends through co-workers and friends of co-workers. Since I specifically moved back to Texas to take over the management of my mom's properties (so she could deal with other matters in her life), and didn't have any friends here at all, I almost immediately made friends with one of the tenants, who shortly thereafter betrayed my trust in her on a level I didn't think was possible. You don't have to be completely heartless to be a landlord, but you do have to definitely keep your business and personal lives completely separated.
posted by WolfDaddy at 11:50 AM on July 27, 2005

Not a landlord, but several of my friends are, and they find it not too much hassle for the extra money they make.

Caveats: All of said friends own only one or two additional properties, all were bought in somewhat crummy condition and they fixed them up themselves, and I live in an area where formerly dodgy neighborhoods are becoming more desirable overnight. None of them get rich off of their investments, but all clear some profit -- closer to your expectation of $200/month.

They're also all rather calm, very handy people, who live close to the houses that they own.

Repeating what others have said, it depends entirely upon many factors concerning where you live, though.
posted by desuetude at 12:56 PM on July 27, 2005

Thanks so much for your thoughtful replies. We will keep all of this in mind as we continue our research.
posted by plinth at 7:05 PM on July 27, 2005

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