The number of people renting a home — as opposed to buying — is on the rise. Increased purchase prices in the major cities along with stricter lending requirements have contributed to Millennials renting rather than buying a home. At first glance, those who are thinking about entering the real estate investment game may see this as a signal to go ahead and jump in with both feet. Or perhaps homeowners who are trying to sell their home may see this as an opportunity to take the house off the market for a while and become temporary landlords.
Yet, there are several pros and cons to consider before committing to the responsibility being a landlord.
Perk: Income stream
It’s true that renting your home brings a relatively consistent income stream. If you’re trying to pay off the mortgage and make a little side income, then finding reliable tenants may be a good decision.
Perk: Tax Deductions
Depreciation, travel expenses, repairs, property taxes, and passive activity losses are all possible tax deductions when you rent homes. Of course, certain restrictions apply, and a consult with your tax professional will reveal additional details regarding what you can and cannot deduct.
Perk: Diversifying Investments
The adage, “don’t put all of your eggs in one basket” holds true. Becoming a landlord diversifies your investment portfolio by providing a stable return on the investment. Of course, this is predicated on the reliability of the tenants – which is why tenants must be carefully vetted. Additionally, compared to other financial instruments, renting homes is considered to be a low-risk investment.
Challenge: They damage it, you repair it
Certainly, the tenancy contract provides you with a certain collection of legal protections in case the tenants are negligent. Having an attorney construct the tenancy agreement will help you to avoid greater legal risk. Ultimately, the landlord is responsible for making any repairs or providing regular maintenance to the property. This requires additional time and financial outlay.
Challenge: Finding good tenants and Soft Markets
Landlords are also tasked with the responsibility to review tenant applicants. Someone may look great on paper but have a history of legal battles with their landlords. What if they have pets? Are they smokers? Landlords must be extremely careful to avoid breaking discriminatory laws. Something as simple as “non-smokers only” can cause a complaint. The issue can be mitigated by hiring a property management company to help you screen potential renters.
Add to this that the renter’s market is cyclical, and there will possibly be periods where renting the property is challenging.
Challenge: Tenancy Laws
Everything from attempting to collect unpaid rent to “squatter’s rights” create a landmine obstacle course for landlords. Each and every state has their own landlord-tenant statutes. What will you do if the tenants just pick up and leave? What can you do if they refuse to leave and you’ve given them a “pay rent or quit” eviction notice? What if they damage the property as a form of retaliation? If you don’t make a repair within a specific time period, you may open yourself up to a lawsuit.
The state and federal laws regarding tenancy can be stringent. Additionally, being a landlord takes a certain temperament since landlords are also people managers — unless you hire a property management firm to do all of the legwork for you (including managing the property). Consider your options carefully in relation to your situation. Renting space can be a very lucrative venture, but only if you understand what you are getting in to.
About the author
Kris Lindahl is a real estate powerhouse operating in ultra-competitive Twin Cities market. Real Trends and Trulia named him among the “Best Real Estate Agents in America.” His marketing methods are so powerful, so tried-and-true, that real estate agents across the country clamor to be included in his coaching sessions. Mr. Lindahl sells a home every 9 hours and particularly enjoys “golfing – anywhere and everywhere!” But you can also find him playing his old high-school sport, football. Oh, and fishing. Visit his Facebook page to see some of the ones that didn’t get away.