Wednesday, October 24, 2007

Pros and Cons of Landlording...

What are the pros and cons of being a landlord? I think there are many. On any financial board there is always someone asking the question of whether it's worth it being a landlord. And there are those who say it's great and those who say it's not. However the reality is that even landlords will tell you it's not an easy job.

The obvious pros of landlording, is having someone else pay your mortgage. If you buy a house in an area where rents are high and mortgages are low you'll come out ahead. Along with an enforced savings by paying off the mortgage, a landlord is able to reap the benefits of home appreciation. They are able to diversify their portfolio with investments other than stocks. Also in retirement, after the mortgage is paid off it a rental property can provide an alternative stream of income.

However, there are many cons against owning rental properties and becoming a landlord. First, renters do not care for the place like an owner. Thus, typically most rentals are trashed and require more $$ for upkeep. What sort of upkeep? Well if a water heater breaks on a weekend you can't tell the renter to wait, you need to fix it asap. Unlike being frugal at home, with a rental you have to fix the house immediately, not wait for a good deal.

Second, the possibility of a renter not paying and needing to be evicted. Or being unable to find a renter and having a property sit vacant. This means needing to have amount of cashflow to carry the property during times when the mortgage isn't being paid by the renter.

Third, landlords often have to carry extra insurance in case their renters get hurt or have someone visiting who is injured on the property. They should also form an LLC and protect their other assets in case any renter/visitor sues them.

But overall I think the pros and cons balance out. The main thing is finding a property which will have a return on investment of at least 8% annually by having a strong positive cash flow. I would never be a landlord if the rent generated by the property did not cover the mortgage, insurance, and 10% maintenance costs. If not I think the money and time would be better spent invested in index mutual funds.

Another factor is being a landlord takes time. If you hire a management company they will take 10% of the rent which increases the amount needed to generate a positive cashflow on the property. Hence it could be a good retirement or job for a stay at home parent. But it might be too time consuming for people working full-time.

No comments: