Becoming A Landlord May Not Be For Everyone, Despite The Allure Of The Potential Wealth.
For a long time, real estate investment has been popular, but it has been limited to those who can afford it. However, with trends such as house flipping and short-term vacation rentals, real estate investment has become more accessible. This has attracted millennials looking for a second income stream during an uncertain economy.
Despite the tempting potential profit, being a landlord may not be a suitable investment for everyone. Rental properties come with upfront costs, legal liabilities, and ethical dilemmas that can dent your dividends. Moreover, being a landlord requires a significant time commitment. So, before taking out a loan to invest in an “up-and-coming neighborhood,” consider below-mentioned three factors.
Recognize Your Commitment Levels
When it comes to rental real estate, there are several property management options available, ranging from hands-on involvement to hiring a remote property manager. Before making a decision, evaluate the amount of time and money you can dedicate to your rental property, as well as the market you wish to enter.
If you have more time than money, consider purchasing a fixer-upper that you can renovate yourself and increase its market value. On the other hand, if you have the financial resources but limited time, it may be better to purchase a rental property. That is already move-in ready and hire a property manager to handle daily upkeep.
However, with increasing mortgage interest rates and property prices around the world, investing in real estate may be financially unattainable for many individuals.
Make Sure You Are Financially Resilient
Like most investments, real estate carries some risks, but it also presents unique challenges. Upfront and ongoing repairs, vacancies, and tenants who do not pay rent can significantly impact your profits and even your ability to pay your mortgage.
Before committing to a real estate investment, it is crucial to have sufficient funds to weather a downturn. Maintaining a cash reserve or credit line can be the difference between surviving a few months of vacancy or tenant emergencies. Alternatively, being forced to default on your mortgage.
“If your mortgage is unsustainable without full occupancy and rent payment, with no flexibility, then you may be in over your head,” warns Nancy Neiman, who rents out her home in the US to help pay her mortgage following a refinancing.
Investors with significant real estate portfolios, financed by loans, often face challenging situations due to the lack of flexibility. Relying on future profits to make loan payments can put both you and your tenants at risk.
According to Nancy Neiman, a politics professor who rents out her home to help pay her mortgage, unforeseen circumstances can arise that are beyond your control. To avoid vulnerability, it is crucial to incorporate a cushion into your business plan before starting to mitigate any potential obstacles.
Recognize The Opinion Of The Tenant
When it comes to rental properties, it is important to remember that you are dealing with real property management. Treating your tenants with respect and understanding can lead to a more reliable return on investment.
According to Alonzo Johnson, tenant association president for a property in the US where he still resides, viewing tenants as partners in a symbiotic relationship can benefit both parties. Providing quality housing and maintaining a high standard of livability can result in consistent payment for services rendered.
Even for those operating on a smaller scale, understanding the rental price required to turn a profit can ensure that the local community’s housing accessibility is not negatively affected.
For Nancy Neiman, an ethical landlord should remain flexible in accommodating tenants’ life circumstances, even to the extent of offering some degree of rent forgiveness in emergency situations. Failure to be adaptable can result in an inability to handle unexpected costs, leading to unethical behavior or financial ruin.