More than once, I’ve thought about becoming a landlord. If you start listening to any number of personal finance podcasts and reading their blogs, you’ll begin to notice many of them hyping the earning potential of owning rental property.
However, is being a landlord really all it’s cracked up to be? Would everyone who purchases investment properties achieve the same level of success? Or are there better and less risky ways to build wealth? Let’s weigh the pros and cons of investing in rental properties and find out. You also skip the debate and learn how to buy your first investment property if that suits you more.
The Case for Rental Property Investing
When you hear people like real estate investor Zach Evanish on the Side Hustle Nation podcast make claims like “single-family homes can still be an almost-passive investment”, it’s easy to get excited and think rental properties could be the fast-track to getting rich.
Lots of other personal finance darlings like Paula Pant have touted its benefits too. She reported earning as much as $125k and netting $43k per year from her network of rental properties, allowing her to enjoy a life of financial independence.
Admittedly, they’re not wrong. There are many fantastic benefits to building wealth using rental properties. Consider that:
- They can provide you with a steady stream of income (assuming you’ve got great tenants who pay you on time every month).
- You can use the revenue from your tenants to pay the mortgage on the property. That means, effectively, your tenants are paying for your property.
- As the mortgage gets paid and the property appreciates in value, you’ll build more equity. That means more money for you when you decide to sell it one day.
- Rental properties are tax-efficient. The interest and maintenance can be written off as business expenses.
- Rental properties are a scalable business model. You can own as many as you want to produce as much revenue as you desire.
- Building an empire of rental properties could lead to you becoming your own boss.
What’s not to like, right? Well, don’t start calling local realtors just yet. Rental property investing is far from being a sure thing.
The Dangers of Rental Property Income
The truth about building a rental property empire is that despite your best intentions and ambitions, it can be a tough road ahead. Just like starting a new business or being an entrepreneur, only a small percentage of rental property owners ever stick with it.
Brandon Turner from Bigger Pockets has stated that as many as 95 percent of the units he’s purchased have been foreclosures that belonged to landlords who failed and lost their properties to the bank.
In another interview with blogger Joseph Hogue, he lost all six of his rental properties when he found out the hard way that being a landlord is a lot more work than he originally thought and required far more time than he had available to give.
Unfortunately, the reality of being a rental property owner means being ready to face some potentially tough situations:
- If something happens on the property (like the furnace goes out), are you equipped to go deal with it (day or night)?
- If a tenant stops paying rent, are you prepared to evict them?
- If the tenants get particularly nasty and take you to court, are you ready to take time off and hire an attorney?
- Will you be able to cover the mortgage if a payment is late or the property sits vacant?
- Is the property even one that will appreciate, or is in a not-so-good area and declining in value?
Granted, some of these topics may be a worst-case scenario. But they do highlight the unfortunate realities that many rental property investors have had to deal with. The question is: Is this what you want to do?
How to Know If Rental Properties Are Right for You
If you’re the type of person who’s up for the challenges we described above, then no problem! There are certainly many different rental property owners who are comfortable accepting these risks and have the right skill-set to handle issues of this nature when they arise.
Even if you don’t feel like you’re personally prepared to take on these responsibilities, you always have the option to partner with a rental property manager. Rental property managers act as go-betweens for tenants and the property owners by handling all of the day-to-day tasks, such as:
- Collecting rent
- Interviewing new tenants
- Dealing with issues / complaints
- Regular maintenance
- The eviction process
In fact, many landlords swear by the use of property managers because it can make the act of receiving rental income virtually passive. This is exactly how many of them go on to own dozens of units that produce thousands of dollars of net income each month.
However, this service will come at a price. Many property managers will expect to receive as much as 10 percent of your revenue. Before partnering with one, be sure to do your homework and make certain that you’ve inspected their credentials.
Despite all of that, if you still don’t quite feel comfortable dealing with the idea of owning rental properties, thankfully there are other options you can explore.
Other Ways to Create Your Wealth
If you don’t mind spending a little more time waiting to become rich, then you can also use the stock market to build your wealth at a slow and steady pace. Thanks to incredible benefits of compound interest, a little bit of savings over the long haul can produce dramatic returns.
401k retirement plans through your employer can be a great way to get started with investing. Someone who contributes $500 per month to their 401k for 30 years could easily achieve a portfolio of nearly $1 million thanks to the awesome power of compound interest. You see this for yourself using this free calculator here. And, it’s also a great way to shelter your wealth through some sweet tax benefits.
Although they are not as tax-efficient, you always have the option to purchase common stocks or other types of securities in the open market. Remember to always invest with a long-term vision in mind and do your research ahead of time before making any purchases.
The Bottom Line
While it’s true that investing in rental property can be a great way to produce income and build your net worth, it’s certainly not without risk. By entering into a landlord-tenant relationship with other people, you’ll have legal responsibilities and duties to perform. You should only get involved if you understand what these are, how to efficiently manage them, and know what you’re doing.
For the majority of people, it may be more advisable to take the safe-and-slow approach to building wealth through other channels. By using something as simple as your 401k, you can automatically make contributions and invest in assets that will grow and compound for years to come.
Contributor’s opinions are their own. Always do your own due diligence before investing.
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