Should you buy a rental property?

Nearly every adult of a certain age has at least one “crazy landlord” story. If you’ve had the occasion to live in multiple locations, you’ve probably experienced a healthy share of shady, unethical, or outright incompetent landlords. I once came home to find a foreclosure notice tacked to the door. Apparently the landlord had just stopped paying his mortgage (although he certainly hadn’t stopped collecting rent checks).

So the bar seems pretty low, which raises the question: should you consider buying a rental property?

Bad landlords don’t make it seem very challenging, but in truth, owning a rental property isn’t for everyone. Here are some basic questions you need to ask yourself before jumping into the fray.

Do you have the necessary cash?

You are buying a home after all, and that’s rarely ever cheap. The housing market is constantly evolving, but in general, banks are much less willing to take on risky loans today than they were even ten years ago. That means you’ll need great credit and money up front – 20 percent of the asking price is a good rule of thumb.

Are you willing to do the research?

Buying a rental property and actually making money isn’t as simple as just getting a loan, placing an ad, and watching the money flow right in. There’s quite a bit of due diligence involved.

That means research, research, and more research. You need to understand the market. What are homes selling for in the neighborhood? What’s the average monthly rent for comparable properties? How much actual profit can you expect to clear on an annual basis and how does that fit into your budget?

In addition, you need to be familiar with all applicable laws that relate to owning and operating a rental property in your state. You may also require professional assistance in understanding the tax implications of the rental ownership. And it might not be a bad idea to consult with a lawyer or other qualified professional when drawing up the lease for your new tenants.

If you’re not willing to spend a lot of time thinking about this investment from all angles, then you may want to look elsewhere for your investment opportunities.

Are you willing to put in the hours?

Owning a rental property is usually considered passive income, because unlike your primary source of income (that is, your job) it earns you money when you aren’t actually doing anything. (That might also describe your regular job, but you get what I mean.)

According to most landlords, however, there’s very little that’s passive about owning a rental property. There’s a lot of time and effort that goes into preparing a property and keeping it up. You need to create a space that someone wants to pay money for the privilege of occupying. You need to market that space to potential tenants. You need to screen applicants and be available to address whatever issues may arise while the property is occupied.

Unfortunately, no matter how easy all those bad landlords made it seem, owning a rental property is a lot of work (and you don’t want to be a bad landlord anyway, right?).

Can you solve problems?

Things break. Disputes happen. There will be drama (and possibly disaster). Are you equipped to handle the various curveballs a rental property might throw your way?

Of course this doesn’t mean that you have to fix every leaky pipe or drafty window personally, but you have to know how those problems will be addressed (and quickly). Will you hire a handyman? Will you use a land management company to manage the property on your behalf? Every third party you bring in means less profit left over for you, so you’ll have to carefully consider what problems you can handle on your own.

Are you prepared for a major setback?

Rental properties are investments and like all investments, reward and risk generally go hand-in-hand. Turning a rental property into a successful investment requires a good amount of emergency preparedness. You need a solid emergency savings account and proper insurance coverage. You also need the kind of temperament that enables you to bounce back from unexpected setbacks.

In short, owning rental property can be a great way to generate supplemental income, but it’s a lot of work. If you have the cash, time, and temperament necessary, you may find a lot to like about being a landlord. Just try to be one of the good ones, okay?

Jesse Campbell photo.

Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.

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