UNDERSTANDING THE RISKS OF BEING A LANDLORD, BOTH FINANCIAL AND EMOTIONAL
Maybe you have seen the commercials about real estate investing that portray being a landlord as living on Easy Street and sipping drinks by the pool. While it’s true that owning rental properties can be a significant step towards achieving financial independence, understanding the risks of being a landlord, both financial and emotional, are important before jumping in. Despite being profitable, it can also be expensive and comes with inherent risks.
Usually, when someone discusses risk in relation to an investment, they are referring to financial risk, which I will address first. However, there are also other risks to consider, and we will discuss those in this video. So stay with us until the end to understand what to expect when owning a rental property.
Here are four expenses you should prepare for as a landlord:
1. Maintenance
There will always be minor maintenance issues that arise with any home, but you need to be prepared for the major problems or an accumulation of smaller issues that sometimes occur all at once. For example, you may need to address issues with the furnace or air conditioning, roof repairs, carpet and paint updates, insurance deductibles, settling foundations, and appliance replacements. These are all expenses to anticipate.
2. Vacancy Time
A house sitting empty costs you money, especially when you rely on the rent to help pay the mortgage. At Kasteel Property Management, we are dedicated to reducing vacancy time through extensive advertising, immediate showings, and prompt action on applications. In fact, more often than not, we fill a property before the current tenants even move out. However, even the best property managers can’t control all variables. Sometimes there are shifts in the market, such as new units being built nearby, and people tend not to move during seasonal holidays. There are also unpredictable factors that can decrease the demand for a particular home, so as a landlord, you need to be financially prepared for potential periods without rent.
3. Legal Counsel
Another expense many don’t consider is legal counsel. When renting out your home to tenants, there is always the potential for liability if things are not handled properly. It’s essential to have a legal professional either draft or review your lease agreement to reduce risk. However, there is always a possibility that someone may try to take you to court, and there might be instances where you need to take a tenant to court as well. Such situations can take time and money to resolve, and depending on the outcome, could end up costing you even more. At Kasteel Property Management, we have a lease agreement drafted and updated by an attorney specializing in landlord-tenant law, and we also offer a built-in attorney retainer program that covers potential eviction costs and legal advice needed for landlord-tenant issues.
4. Delinquent Rent
There are many factors that can affect your ability to collect rent, such as a tenant losing their job or facing unexpected expenses one month. As crazy as it sounds, there could even be a worldwide pandemic that affects people’s ability to work and pay rent. If you’ve been paying attention, you will understand how crucial it is for a landlord to maintain a financial reserve to handle any issues that may arise.
5. Having Money in Reserve
So, how much money should a landlord have in reserve? Ask yourself how much you spend on maintenance for the home you currently live in and realize that owning two homes will double those expenses, while owning three homes will triple them. If your rental properties are older, they may require even more repairs and expenses. As a general rule of thumb, I recommend having three months’ worth of rent as a reserve for each rental property you own. This will provide you with peace of mind, knowing that you can weather most unplanned expenses.
Additionally, you should save in advance for a new roof, as well as new carpet and paint every 8 to 15 years. Consider that there are many issues you, as a homeowner, may choose to ignore due to cost and time involved in repairs. As a landlord, that’s not really an option; tenants will expect things to be fixed. Otherwise, they might decide to leave, and unresolved maintenance issues will make it harder to find new tenants.
It’s important to remember that a tenant enters into a contract with you based on a home that features specific functions, and they expect those to be maintained. At Kasteel Property Management, tenants can report maintenance issues through their online portal, and a service professional usually contacts them the same day to set an appointment. This prompt action results in happy tenants who want to stay, ensures that issues are fixed properly, and prevents further and more costly damage down the road.
When our maintenance professionals arrive, they carefully evaluate the source of the issue. If the problem is due to neglect or damage caused by the tenant, we ensure that the bill is charged to them and taken from their security deposit as necessary. If the issue is determined to be related to normal wear and tear, then it is the owner’s responsibility to fix or replace it, and the tenant has a right to expect that it will be taken care of within a reasonable timeframe. Just as you expect the tenant to uphold their end of the deal by paying rent, they can expect you to fulfill your responsibilities in maintaining the property’s major features and functions.
Non-Financial Risks of Being a Landlord
So, what are the non-financial risks of being a landlord?
- Emotional Strain and Stress: Even with a reliable property management company like Kasteel Property Management, some people still worry excessively. For example, I had a client who decided to sell her rental property and exit the landlord business because thinking about it kept her up at night, despite everything going well with her property. Everyone has their comfort level with risk, and real estate investing is not for everyone.
- Time: The amount of time you need to invest in your rental can vary greatly depending on the person and the property. Your time is valuable, and your stress level has its limits. If you choose to take on the roles of manager, marketer, plumber, electrician, handyman, attorney, and inspector, all that extra time spent will limit you to managing just one or two rentals, leaving little time for yourself and your family. I recommend using a competent and trusted property management company like Kasteel so you don’t have to be involved in every task and issue that arises. You can watch our video on The Top 6 Ways a DIY Landlord May Lose Money. You can be more profitable in real estate when you let the professional property managers handle the heavy lifting, allowing you to focus on growing your investments.
- Getting Hooked on Real Estate: Another important consideration is that you may run the risk of getting hooked on real estate, leading you to want to expand your investments and buy more properties. When you see the benefits, you might want to share your experiences with others, risking boring your friends and family—trust me, I’ve been there.
In summary, despite the risks associated with investing in rental properties, if it is done properly, there are far more pros than cons. The benefits of owning real estate can propel your retirement plans forward, and you can genuinely enjoy relaxing at the beach with a drink in hand. Just don’t expect it to always be easy or think that you’ll achieve financial freedom right after closing on your first purchase.
