Many renters might theorize that at some point, they'll want to become landlords themselves. Part of this is undoubtedly because we often hear that real estate is the road to wealth, but while being a landlord can be a good idea for some people, there are also many individuals who should probably avoid owning rental property. This is because what we typically hear about landlording is very different from the reality of being a landlord. In fact, the truth is that owning and managing rental properties is time consuming, stressful, and hard work.
To give you a feel for whether or not being a landlord might work for you, let’s discuss some of the information and courses of action you should consider.
First, you need to extensively educate yourself on the process and issues involved with owning rental property. Too few people do this before jumping in, and remember that simply reading books about being a landlord is not enough to adequately prepare you for the responsibilities, especially if those books are written by career authors as opposed to people who actually own properties. You need to find actual property owners who are willing to share their experiences and lessons with you. Unfortunately, the number of people who do own quality, wealth-building rental properties (and do a good job managing it!) is very low. Many real estate owners don’t even know whether or not the properties they bought are actually adding to their wealth, but regardless, they sure are happy to boast about how well they're doing!
Historically, people purchased real estate and just hoped that it would appreciate in value and wealth would be earned. Over the several decades, that probably will come true, but today, while many people still buy properties for appreciation, that just isn’t a smart way to purchase real estate anymore. The smart way is to buy properties that have positive cash flows so that an owner is earning a rate of return on their invested capital, regardless of how the property value changes. An investor’s ability to analyze the pool of rental properties available for purchase and cordon down the ones that are cash-flow positive is the difference between building wealth or not.
It certainly is a good time to buy real estate. Long-term interest rates are at historic lows around 3.99% for a 30-year fixed rate loan and home prices have fallen to 2002 levels, according to The Wall Street Journal. However, the article also illustrates the many issues and unknowns related to property ownership – like the unanticipated $40,000 costs to fix a building code issue or when an owner has to evict tenants. In addition, owning real estate is very different from owning financial assets. For example, with financial assets like stocks and bonds, your typical involvement is reviewing your statement every month or so. But real estate is much more involved — it deals with plumbing and electrical issues, repairs and maintenance needs, and dealing with tenants. These items all take your hard work and time to make calls, schedule and meet workers at the property, and deal with tenants who are sometimes not the most reasonable of people. In addition, disasters happen too. The unit may get flooded, your tenants might stop paying rent (meaning you have to pay thousands to evict them) or a myriad of other issues could, may, and will occur over time.
Now, you may be thinking about just having a management company handle it all. This is a fair thought, as management companies may do a decent job, but you'll still need to be involved if you want to earn a decent return. Management companies typically don’t get paid very much and are not going to shop hard and be creative to minimize costs. Nor are they going to work as hard as you will to keep the unit rented and rent checks coming in. Only you have the full incentive to keep your rental property operation running smoothly and you will need to be involved if you want to earn a fair rate of return on your money.
Overall, real estate can be a great long-term, wealth-building strategy, and hard work will make that strategy materialize over a couple of decades. But it is not easy, risk-free, or the guaranteed path to wealth that many people believe it to be. But for those willing educate themselves and do the hard work it takes to succeed, it can make a nice retirement package years down the road.
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