Are You Ready to be a “Landlord”?
Landlord is a funny word. It conjures up images of moats, castles, and knights in shining armor focused on the size of their swords. If you’ve been reading these marvelous blog posts, I don’t have to convince you about the financial benefits of investing in real estate.
- The prospect of building multi-generational wealth.
- Leveraging passive income for your long-term security and short-term financial freedom.
- A better-diversified portfolio.
- Taxes saved.
- Real estate isn’t as volatile as traditional financial instruments.
- Some would say it isn’t liquid, but this is Denver.
While it’s amazing to receive a check every month that covers your mortgage on paper, be sure to deduct your time, sweat, and cash before celebrating your roll in the landlord dough. Let’s discuss what should be considered before you take the plunge.
First, be honest with yourself. Do you really want to beg your tenant for the rent? How about their calling at 3 AM when a pipe bursts? Does Saturday afternoon at Home Depot sound like fun or root canal? Hiring a property management company solves all of that but the good ones don’t come cheap. We can definitely give you some tips on interviewing them.
Find a Place That’s “Just Right”
Think like Goldilocks. Zero in on a property that is right in the middle of both your budget and the neighborhood. This strategy helps you conservatively evaluate the potential returns on the real estate investment against stocks and bonds. If you define your goals and know your boundaries, an A-level real estate team will help you achieve them. Luckily, I know a few of those. What should you roughly count on financially?
- 30-80% of your rental income will be devoured by total expenses.
- Higher interest rates for investment properties than primary residences.
- Rates typically quoted with a 1% discount point.
- Plan on putting 20% to 25% down. You can put 15% down but the mortgage insurance and rate are much higher.
- No mortgage insurance in most instances.
- Tuck away 25% of your rental income for literally a rainy day, so you can make a fast, major repair while waiting for an adjuster.
- Personally, I like to have 3-6 months of PITI in reserves… but It takes time to build that up.
- Speaking of repairs, heard of landlord insurance? It covers property damage, lost rental income, and tenant/visitor injury liability.
- But you already have homeowner’s insurance! So how often have medical, car, or home policies covered 100% of your claims?
- Try to bundle your home and landlord policies together so two companies can’t wiggle out of something.
Be financially prepared to eat one month out of every 12 when there may be gaps between renters for maintenance and cleaning.
- Bottom line, a reasonable margin to shoot for is 10%.
Flipping. Heads You Win. Tails, The Bank Does.
Unless your brother-in-law is a contractor (and your sister’s marriage is stable), ask yourself if you’re ready to take on the risk and financial exposure of “flipping”? That sounds obvious, especially after 2008, but for every person who cashes in – they’re always the one boasting the loudest – you rarely hear about the person who went over budget on their remodel and hope to break even in three years.
“For Rent” Signs Don’t Quite Cut It Anymore
A landlord’s job description includes marketing. The goal is to paint a picture of the renter’s emotional experience living there. Maybe you’ve heard of that little adage “location, location, location”? Focus on what makes your neighborhood unique. Granite countertops are nice (see flipping) but proximity to public transportation, bike paths, a farmers market, and shopping is nicer. A good school district and low crime rate don’t hurt either.
Think like your renter, not you, especially if they were born after 1985! Many of them don’t even own a car so, hopefully, you already learned about walkability scores before you signed the mortgage. Use video to tell your story on social media and be sure to pack local, Google-friendly words into online ads.
Have You Considered a Trial Run?
Finally, try out being a landlord by renting out your own home before buying a second one. This is as stress-free as landlording gets. Just find a short-term rental nearby (or crash on your old college roommate’s sofa just for old time sake) and give it a go. Did it feel like Santa was depositing directly into your Venmo every month or were you dreaming of committing a felony every time you heard your tenant’s voice?
If you do decide to take the permanent plunge, please get in touch with our office at 303.214.6393 or email me at firstname.lastname@example.org so that we can answer your individual questions and put together a long-term plan for your family. We recommend you also consult with your financial advisor, attorney, and accountant. There are important landlord and tax laws that I haven’t touched on here today.