So You Want to Be a Landlord

Build equity and assets
The opportunity to build equity and assets is one of the more important reasons that people enter the business of rental property ownership. When you own real estate, you have gained equity and build wealth when the property’s value increases. You add another checkmark in your asset column, and that can propel you towards your next venture. Many property owners start out small and end up with many properties over time. They are able to leverage their assets, in this case a building, to purchase another rental property. So, even someone without a lot of money can build a strong income business.

Create income outside your profession
Many property owners are regular people who hold regular jobs. By entering the business of rental property ownership, you are making a big move towards creating a new source of income for you and your family. Building a business that allows you to hold your day job, while increasing your income, is one of the most sought after business combinations in the world. Imagine purchasing a rental building and, 10 or 15 years later, being able to semi-retire. The added income puts you in a more powerful position then most people. If the “regular” job goes away, not all of the income does, and that is great! This is a long-term business that takes time and effort to become successful. Be patient. If you are new to the rental world, you must understand that it is rare in today’s market to purchase a building that is earning you positive rents each month-- right from the start. Most buildings are priced at a multiple of the annual rental income. But, if you do your homework, you may find a building in an area that is appreciating fast and has undervalued rents. Making the right improvements to the units in the building, you might see a significant jump in monthly income. You may even consider moving into one of the units to offset the difference in income versus expenses.

Reduce your living costs
The previous sentence suggests that there are ways to make your life less expensive. By moving into a rental property you have accomplished a number of things. First and most importantly, you are shifting the living expense elsewhere into your new investment. Think about it like this, you spend money for your own place to live, so by residing in the rental property, you offset any loss by the amount you would have been paying in the first place. Imagine you live in a rental house that costs $1200 per month. By leaving that place and moving into your rental property, you can subtract that $1200 away from operating loss. Of course, you declare your loss to the IRS, because a loss helps your tax situation. This tactic is intended to increase your cash flow.

Living in your rental property also has side benefits. For example, if you needed to evict someone, the timeline is shorter for live-in owners. You also do not need to trek across town to perform building maintenance. You are already there! Further, you may make a lasting relationship with your tenants and that is beneficial to the rental unit.

Every Business Has Risks
As with any business, being a landlord has risks. The possibility of lawsuits, insurance claims, property damage, property devaluation, changing city ordinances, and vacancies are just a few. The most common of these risks is your ability to handle vacancies without defaulting on a property loan. Any long stretch with units vacant has an impact on your ability to support the building’s expenses. Part of your vacancy-management strategy will need to include: how to effectively market your vacancies, and how to fund income loss. Start by calculating the number of units and their projected monthly income. Subtract your fixed monthly expenses (mortgage, insurance, utilities, etc.) and you will know your monthly base income. Remove from this equation the rental income of one of your units, and you determine what your monthly risk will be per vacancy. Funding may come directly from your profits, or in some cases, from an emergency account. A general rule of thumb is to be able to fund a 100% vacancy rate for four months. If something as devastating as that happens, you will have enough time to start to fill those vacancies without defaulting on your loan. After the vacancies are filled, use the profits to replenish the backup account.