Research points to now being a good time to be a landlord. Millennials–who are often choosing to postpone marriage & kids–rent for longer than previous generations. So, if you own a starter home (priced in the $150K to $250K range), it could be a hot rental commodity–especially since millennials seem to be skipping purchasing a starter home & jumping straight into a more substantial real estate investment.
So, should you stick a FOR RENT sign in the yard and start interviewing potential tenants? Not so fast. Renting out property can have some pretty significant drawbacks.
Money, Money, Money
Owning rental property isn’t a quick path to cash income. First, there’s the obvious caveat: you still have to pay the mortgage on the property–whether you have a renter in place or not. Then there are the inevitable repairs and upkeep you’ll need to pay for–and don’t forget property taxes and insurance. How do you estimate your expenses on a rental property? Here are some formulas provided by RealPropertyManagement.com that might be helpful:
50% Rule: total operating costs (repairs, maintenance, taxes, insurance) will equal half of your rental property income. So if your property rents for $1,200/mo, you should expect $600 of that to go to keeping the property up and running.*
1% Rule: maintenance will cost about one percent of the property value per year. So a property valued at $190,000 should cost $1,900 a year to maintain (or $160 a month).
Square footage formula: Plan on $1 per square foot for yearly maintenance costs. So a 2,200 foot rental should cost roughly $2,200 a year in maintenance costs.
5x rule: maintenance costs will average 1.5 times the monthly rental rate. So if your home rents for $1,200, then you should anticipate spending approximately $1,800 a year in repairs.
Murphy’s Law: anything that can go wrong, will go wrong
*If you borrowed money to buy the property, you’ll need to figure in principal and interest, too.
Time is Tick-Ticking Away
Let’s say you know what kind of expenses to expect… and you still want to move forward. Now you need to consider the drain on your time and energy. That’s right–being a landlord is a job. And often, it’s a side hustle–in addition to your regular 9-5. What types of tasks will you have to do? That depends on how much of the work you want to farm out. But remember, the more you hire out the more money you spend. Ultimately, you’ll have to balance your time and expertise against hiring real live experts (at a real live cost). Tasks on your landlord to-do list:
Show the property to interested renters.
Run credit checks and background checks on potential renters.
Field tenant phone calls–about everything that happens at the unit.
Make repairs OR find contractors to make repairs.
Collect rent from delinquent tenants.
Address inconvenient emergencies as they arise.
The most important thing to remember is that you don’t get a vacation from being a landlord. If something major happens with the property, you’ll have to address it–whether that means driving over at 2 a.m. in your pajamas to fix a small leak or making phone calls from Fiji to deal with washing machine malfunction that flooded the entire unit. As the landlord, you are responsible for fixing all issues that arise with your rental unit in a timely manner. Of course, you can outsource all of this. But it will run you approximately 10% of the rent you receive monthly, depending on the market.
Human Nature Is What it Is
This might seem obvious, but when you are a landlord, you have to deal with people. And people can do some mighty interesting things. From intentional floods to exorcisms, people can be all kinds of destructive. And, as much as you may want to believe the best about people, the truth is that very few tenants will treat your rental property as if it is their own. Because, at the end of the day, it isn’t theirs. And they can simply walk away when the lease is up.
Although your tenant can walk away, it’s much harder to get them to go away. Eviction for non-payment of rent or for lease violation takes time. It’s a process that looks nothing like it does on TV, with the evicted party’s belongings strewn about the front lawn. In fact, in Florida, it’s illegal to forcibly remove a tenant yourself. Eviction is a legal process with timelines that can range from weeks to months–and cost in the thousands of dollars–all while you are receiving no rent money.
If it ever becomes time to evict, the tenants may choose to engage in a no-holds barred showdown. Take, for instance, the case of the Bonfire Bandit: “For eight years [the tenant] lived in this property, mostly as a good tenant. But then something changed. He stopped paying and became irrationally angry over our insistence on rent being paid. After several late notices and conversations, we finally filed for eviction. He slowly moved all his stuff out of the home while the eviction date came closer. Finally, after all his “good” stuff was moved out, I left on a business trip to Charlotte, N.C. That’s when I got the text: ‘Your house is on fire. You need to call me.
Apparently, a box was left on top of the stove… and the burner turned on. Accident? On purpose? We’ll never know. But the fire destroyed the kitchen completely and the smoke caused damage throughout the remaining house. In total: $61,000 in damage. It’s a good thing I had insurance!”
To Rent or Not To Rent
If you do decide to test the waters and rent your property, taking simple precautions like obtaining landlord insurance and hiring a property manager to handle the ins and outs of daily life with a renter can save you time, energy, and (ultimately) money. But if, after weighing the pros and cons, you decide life as a landlord isn’t for you, give Angie Buys Houses Central Florida a call at 407-603-6285. We’ll talk about how we can buy your property from you, with CASH, and you can move on to bigger and better things (that, hopefully, don’t involve bonfires in your house).
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