Learn how to be a successful landlord if you decide to purchase rental property.
Should I become a landlord?
There’s a reason that many people likely ask themselves this question: Becoming a landlord is an appealing prospect and there are many pros:
- Growth potential: In most cases, property is a “good investment” and sees long-term increases in value
- Rental Income: Any positive difference between the rental price of a property and the monthly cost in the property is money in your pocket
Yet, before you dive in, it’s important to consider the potential downsides as well. Some cons of landlording are:
- Asset Concentration: Rental properties aren’t liquid assets, and therefore can’t be moved quickly in the case of necessity
- Tenant Issues: While the “nightmare tenant” is on everyone’s mind, there’s also more common tenant issues like getting late payments or not having tenants at all
- Managing the property: A landlord needs to make sure the property is taken care of, whether that means fixing repairs or managing evictions
- Showings: In order to fill a unit, expect to spend a lot of time showing the property to different potential tenants. This process can be not only time-consuming, but potentially uncomfortable or risky depending on your market.
This guide will lay out all the steps and considerations so that you can decide if you’re ready to take the plunge - and how to get started.
JUMP TO SECTION
While it may seem silly, the first step to becoming a landlord is getting a rental property. At first glance, this may seem like a no-brainer, but there are many different types of rental properties, and all have their benefits and drawbacks. However, unless you’re in a situation where you have a house that you want to rent out instead of sell (in which case, make sure you read this great article for tips on that), it’s important to consider all the different types of rentals, and what would work best for you.
(Note: I’ll only be talking about residential rental properties because, while getting into commercial real estate can be incredibly lucrative, the barrier to entry is higher, and most people start with residential real estate.)
Renting out a Single Family Home: Pros and Cons
The majority of independent landlords (aka people choosing to become landlords rather than rental companies) have single-family homes as rental properties (source). There's a good reason why this is the case. Single family homes tend to attract families who want to stay in the area for a longer amount of time. In fact, one out of four renters of single family homes will stay in the rental for five years or more (source). The longer tenants stay means the less often you will need to search for new tenants, and the less likely your house will be unoccupied.
Yet, it’s not all good. Renting out a single family house will likely mean that your tenants have children or pets, both of which can cause a lot of damage to a house, but only one of which you can limit. Any guesses which one? (The answer is pets. While choosing to limit pets might be legal, it’s illegal to not allow tenants with children!) In addition, since these types of rentals can be expensive, you’re more likely to have less units, which opens you up to more risk because there is a lack of payment diversification.
Renting out a Multi-Family Home: Pros and Cons
While single family homes are where most people start, it’s not to say that it’s the only way to go. In fact, renting out a multi-family unit has some definite advantages. One of the largest is that you can live in one unit of a multi-family rental, and use the other units to pay off the mortgage. This is often called “house hacking” and is often regarded as a great investment. If you’d like to read more on this specifically, make sure you start here. In addition, multi-family units can offer a higher overall income due to the number of units that you can have on one property(source).
However, know that multi-family units are more likely to attract shorter term renters, which means that you will likely be spending more time finding and selecting new tenants. In addition, more units mean more things likely to break. For example, if you own a triplex, there’s a guaranteed minimum of three toilets that could go bad.
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