Say for instance you have a house. It could be that you own it and are thinking about downsizing from it, maybe you are moving for another reason, or perhaps you inherited it. Regardless of the situation, perhaps you are weighing whether to sell it or lease it.
This article will explore the topic so you can make a more informed decision. This is 100% written by me, no AI, no copy paste, no content library.
Let’s assume that the upside is the ideal scenario where your house is 100% occupied all of the time, nothing breaks, all of the payments are made on time. In this situation your house will be paid off for you and you can just sit around collecting checks until the end of time. We don’t really need to explore that any more because the upside is obvious. In this ideal situation you are probably thinking that you wish you had 10 of these.
So now let’s come back to reality and explore some of the things that can temper this idealized scenario.
1. Vacancy and Turn Times: Many people that have never managed a rental property think it is just about collecting checks every month, but before you can do that you have to market a property, screen tenants, and keep a property ready at all times while it is being marketed. Imagine a one year lease ends, you need 30 days to market the property and get it leased again. That is 30 days where you are covering the expenses 100%. Imagine you need to do some basic make ready or remodeling, that 30 days stretches to 60 days. All of a sudden 18% of your projected annual gross rent has been erased.
2. Capital Expenditures and repairs: During a turn between tenants you will have make ready expenses such as paint, carpet, cleanup, utilities, etc. Those are all general and can be accounted for, but what happens when a large ticket item needs to be replaced? Need a new roof? There goes $15-30k. HVAC system stopped working? There goes $10-20k. Expenses like this can wipe our years of cash flow or profit from a property.
3. Insurance and Taxes: Most homeowners don’t realize that once they move out of a house, their standard homeowners policy is probably inadequate and unlikely to cover the property in case of an incident. Rental properties typically will be covered under first what is called a vacancy policy, which is exactly what it sounds like, and then a policy that is in place to protect a house when it is occupied by a non owner. Oftentimes these policies can be 2 to 3 times more expensive than a standard policy.
Further, once you move out of your house, any sort of homestead or senior tax exemptions become void and you must resume paying the property taxes at the market rates without any reduction.
4. Potential Profit vs. Actual Profit(or loss): If a rental property can be considered a big spreadsheet with its income and expenses, the arithmetic of becoming a landlord makes more sense for some homeowners than others.
If you bought your home before prices began to rise quickly, or if your interest rate is much lower than the current rates, then the income from rent payments often can fully cover the monthly cost of owning the house. On the other hand, if the house purchase was done more recently or if the interest rates are closer to the prevailing rates today, then you may have a deficit between the rent and the costs that have to be paid out of your pocke.t
Often, many people only look at the rental price versus the monthly payment without also taking into account the other costs of ownership such as taxes, insurance, HOA payments, repairs, vacancy, etc. It is advisable to get as complete a picture as possible before deciding what to do.
5. Dealing With Humans: Per a recent Wall Street Journal article on the topic, the main subheading was: “Home sellers who become unwilling landlords find it can be a ‘nuisance and a hassle’ to contend with renters.” Further: “It’s such a nuisance and a hassle to have a rental property.” It is easy to fall in love with the idealized image of that house sitting there paying itself off month after month, but people are anything but predictable.
6. Surprise Scenarios: No one likes bad surprise, especially when tied to such valuable assets as homes, but most people don’t consider scenarios like evicting a tenant or getting sued.
Depending on where you live, laws can either be tenant or landlord friendly. If you live in places like Missouri or Texas, often an eviction can be a pain, legally expensive, but somewhat speedy. When all is said and done the process can take anywhere from 60-90 days, and less in some circumstances. But in states like California or New York with far more tenant friendly laws on the books, the process can drag on for a year or more. Here in Missouri we don’t have to worry about those longer timeframes, but we do have to consider the legal costs and forced vacancy costs of such possibilities.
How about if you have a pool? Or maybe your house is older and perhaps the electrical system is not fully up to code? If there was an incident could you absorb the cost of a major lawsuit? Again, more food for thought.
Overall, becoming a landlord often means getting your hands dirty. It comes with financial risks, including damage to the home, or disputes with tenants that many home sellers never imagined they would encounter. Hopefully this article helps you go into it with eyes wide open. If you want to discuss any of these items or more, Contact Fredo Buys Houses today to learn more about how I can help you sell your house quickly and easily. 314-884-8844