Tuesday, November 25, 2008

Why Being a Landlord isn't all it is Cracked Up to Be.

Do you remember about 4-5 years back when there was a lot of hype about becoming rich through being a landlord? There were a ton of books about it and everyone was getting into rental properties. That may be fine for some folks, but as far as I am concerned - it is a whole lot of work and certainly not the best source of income for everyone. Passive it ain't.

The concept sounds great - you buy a house, perhaps one with more than one unit in it, then rent them out. The tenants pay the rent which pays the mortgage and you get a piece of real estate for "free" - and maybe even make a little something off the top. Get that place paid off and it is nothing but sweet, sweet profit. It all sounds good, except like a lot of income earning ideas that sound really good, there is quite a bit more to the story.

One of the things the books didn't talk about is that as soon as you start renting you are dealing with people, and let's face it, people are quirky. There are things you can try to do to minimize the wackiness of your tenants (credit reports help), but you can't ever really know who you are going to get. I know a number of people who are landlords and every one of them has a few "wacky tenant" stories. Rent to college students? Think parties and property destruction. Rent to families? Think children and property destruction. And let's not even get into the danger of pets!

Then, even if you find a great tenant and get them to sign a lease, you never know when you are going to have to be putting out that old "For Rent" sign again. After all, leases can be broken... and if it takes a few months to find a good tenant, guess who has to come up with the rent? You. My house has a one bedroom apartment in it that I rent out. Since taking over the house, I am officially the landlord. (sigh)

I'm blessed, I don't have a wacky tenant. I have a nice gal who is quiet and pays her rent on time. She keeps her apartment immaculate and takes good care of my property. However, in the last five months it seems something is always going wrong:

1. There was her toilet. I ended up spending somewhere around $30 rebuilding it from the ground up so it would stop randomly flushing.

2. There was her freezer seal. I spent $90 replacing that baby. Cheaper than a new refrigerator, I'll grant you, but still fairly costly for a woman on a budget.

3. There has been her heat. She claims her apartment is constantly cold. I asked her to remove her window a/c unit (which she did) and gave her window seal kits to install (another $30.) All to no avail. So, tonight I am going out to Menards to pick up a supplemental heating unit, approximate cost $45.*

These are just the expenses of broken items, there are also other added expenses:

1. We are on the same water bill, so that is higher.

2. Same thing with natural gas, my furnace heats the whole house. (If you remember, she also complained that the a/c wasn't cold enough in her unit.) So, I keep the house warmer in the winter than I would if it were just me, and colder in the summer.

3. Trash. She uses my trash. Because of this, I have a larger cart than I would if it were just me.

4. Snow removal. Though she doesn't park in my driveway, I have to make sure that sidewalks and steps are clear and free of ice and snow. I would probably do this anyway, but I make doubly sure for her. I bought extra salt this year.

Now granted, I could be a "slum lord" and not worry about a lot of these things, but that just isn't my style. Plus, I've been a renter myself and I know what it means to have both good landlords and bad ones. The better landlord you are, the better tenants you get. Personally, I need to have good tenants since that income is very important to me. (It isn't even counted in the $900 I need each month. She pays $550, so I would then need $1,450. Yikes!) I also get to write off a portion of these expenses, which believe me, is important, but still, for now this is all out of pocket.

So what does this all mean? First of all, I would not recommend being a landlord unless you either 1) know how to repair things or 2) have the money to hire someone who does. Keep in mind, being a landlord means you are going to be doing maintenance not only on your own home but also the home of every person you rent to. Also, be sure you know what you are getting into. Talk to some people who are landlords, ask them about their success stories and their horror stories, find out what types of situations they have had to handle. Finally, remember that while there are some months where the income will come rolling in with no work on your part, there will be plenty more requiring a lot of effort and money. Try to be prepared for that.

If you do decide to do it - I wish you good luck and many happy tenants!

*Thanks to Catie who is doing her own home improvement projects and did some window shopping for me on heating units!!

Photo by: judeanpeoplesfront


Laura @ no more spending said...

Good post Dawn..I agree, renting property is definitely not a way to earn passive income.

Catie said...

You really have had a rough few months with that! But I think when tax time comes along you will be happy to see a lot of your investment coming back to you!

Dawn said...

Thanks Laura! I appreciate your comments.

Catie - Oh my, I HOPE so. I almost don't dare think about it.

Mary@SimplyForties said...

Like you, I have a little apartment next to my house that I rent out. My tenant actually came with the house. As a result, I've only been in there a couple of times and I have to say, it's a dive. My tenant, on the other hand, is a gem. She house sits for me whenever I go out of town, feeding my dog, watering my plants and bringing in my mail. A couple of years ago my water heater exploded and my basement filled up while I was on a two-week vacation and she dealt with it all by herself. I am so happy to have her I keep asking her what I can do with the apartment that will make her life better. She won't let me do much but a few months ago I bought her a new stove.

She pays very little rent and all her utilities are on me and I'm still constantly afraid she'll move out! I'm so afraid that my next tenant will be a bad one that I'm afraid I won't rent it again when she does leave. You're right, being a landlord is not for sissies!