This must be one of the biggest topics of conversations that I have with homeowners when they are looking to move, sell, trade up to a bigger home, or must relocate. They are locked in on a crazy low rate in the 1’s, 2’s, or 3’s. They have a nice low payment, realize they can rent out their house for much more than their payment, and make some nice cash flow. Everyone will do this if they have enough money to purchase the next home, right? Not necessarily because NOT everyone wants to be a landlord and take on that responsibility. They would rather take the cash, put it down on a new purchase, pay off some debt or save it in the bank for other opportunities. You can earn 4 to 5% easily with your cash sitting in the bank these days
If you want to keep the house, rent it out, and be a landlord that is a great option too. The question is when it makes sense and when does it NOT make sense. On the surface, let’s say you are going to rent out your house and make $500 a month, to some people that might be a good cash flow and sound like a great idea. To others, they might want to make much more for it to be worthwhile. Let’s say you decide to rent out your house and become a landlord, I mean what could possibly go wrong? You rent your house to a nice family, you make your $500 a month, and sit back and collect that mailbox money. This could happen and everything goes as planned and you have a great experience as a landlord.
There are also many things to consider when becoming a landlord and understanding the costs of renting out your property. When I see someone tell me they are going to make $500 a month, I get a little nervous for them. WHY, because of my experience and knowledge of what could happen and what expenses could pop up that so many people are NOT thinking about because they have never owned an investment property.
Someone must pay the mortgage, taxes, insurance, maintenance, landscaping, repairs, water bill, electric bill and when a tenant moves out you must get the property ready for the next tenant. There are the basic items and we have not even talked about a situation when a tenant is NOT able to pay rent or tenants who damage the property. What if something breaks – plumbing, electrical, roof leak, and the list can go on and on. I am not trying to scare anyone; I am trying to educate them about the reality of owning an investment property. For most of us, things will go great, and we will have minimal issues, but things can come up or happen that we must be ready for. So, if something does happen and you are making $500 a month or even more that could eat up your cash flow quickly. When you have a rental property, you cannot say, oh I will fix that later or just live with that for now, tenants have the right to have items repaired or they can just STOP paying rent.
You can run so many scenarios or what-if situations while owning a rental property. I always let clients know, if you have an investment property for 5 years, be prepared for something to come up and that something could be a BAD tenant that cost you thousands, a plumbing issue, a slab leak, and the list can go on. Be prepared to maybe make NO money for 1 year out of the 5 years. Have reserves set aside for issue and screen your tenants well before signing that lease.
At the end of the day, I am a real estate investor that has cash flow and has been in this game for a while now. My wife and I used to manage over 1000 units, so as you can imagine, we have seen the good, bad, and the ugly. I love the business, but I also understand the business and what to expect. Treat this like a business and you can do just fine. If you are barely making any cash flow or breaking even on a house you might rent out, you can see over time that you could lose money. Just be prepared and be smart about your decision to rent or sell.
