Is being a landlord worth it?. How do I make money from rentals? What…

The Good

Owning rental property is a great concept for building wealth.

On our end, it required a cash down payment and will require years of cash support via repairs, upkeep, and major component replacements. At the same time, someone else is paying off a property for us. Once the homes are paid off, we will have two additional income streams to add to our earnings from our 9-to-5 jobs. Even after paying for repairs, the cash flow will be significant and will (hopefully) help us reach an early retirement. We often enjoy months at a time without thinking of the properties at all. Additionally, our properties generate a small amount of side income, though at this point we use the additional funds to accelerate their payoff.

Holly's first home, which became her first rental.

Holly’s first home, which became her first rental.

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Landlord-tenant conflict

Reasons for suing a landlord

While there are several reasons why a landlord-tenant relationship could sour and for which a tenant could want to sue their landlord, in New Zealand it is actually the Tenancy Tribunal that disputes get dealt by. Common issues that the Tenancy Tribunal handles are the following:

  • Illegally keeping the security deposit: If a landlord is withholding return of a tenant’s deposit or if deductions have been made from the deposit that were not agreed upon in advance.
  • The landlord refuses to reimburse the tenant for a repair: If a tenant covers the cost for a necessary repair affecting health and safety, it is illegal for the landlord to not reimburse them.
  • Unit is uninhabitable: If a tenant does not have running water, the heat is not working in the winter or they have mold or lead paint hazard, they can file a lawsuit against the landlord.

Harassment

A landlord using aggressive methods to pressure or intimidate a tenant constitutes harassment. Actions such as shutting off a tenant’s utilities thus making the property uninhabitable, refusing to perform repairs and property maintenance, raising the rent, improper notice and verbal and physical threats are considered harassment.

Trespassing

Landlords are required by law to inform their tenants in advance if they are planning to drop into their property. Even if access to the property is necessary due to an emergency, they must contact the tenants and obtain their permission. Entering a property without being authorised to do so may result in a landlord being charged with trespassing.

Calling the health department on a landlord

Landlord responsibilities include keeping a rental property in a habitable condition. If there are health and safety issues in a rental property that were not caused by the tenant (such as problems with pests, mold or lack of running electricity and water) and have been addressed with the landlord to no avail, then a tenant has the right to notify the health department.

Suing a landlord for emotional distress

A tenant cannot sue their landlord for infliction of emotional distress, but they can turn to the Tenancy Tribunal to deal with the distress caused by harassment or conflict over uninhabitable rental conditions.

Staying without paying rent

A tenancy agreement should clearly state when and how rent should be paid. If rent is overdue based on the terms of the agreement, the landlord will notify the tenant in writing that they have 14 days to pay the rent. If a tenant is more than 21 days behind in rent, the landlord can apply to legally end the tenancy. In those cases, most tenants are evicted within 90 days.

Immediate Eviction

A landlord cannot evict a tenant immediately. According to New Zealand law, landlords must invoke a three strikes eviction policy against renters by giving two initial warnings followed by a 90-day notice period.

Repairs and maintenance

Going back to the cost of maintaining a building—this will likely be a large expense, depending on how many units your building has. As a landlord, you can’t just ignore leaky toilets or other minor issues like you might if you lived in your home and wanted to avoid spending money. If a tenant asks you to fix something, you have to do it.

And in between tenants, you may have to fix up the apartment simply due to the wear and tear of being lived in. If you want to continue charging as much as you did for the original tenant, the apartment will have to be just as nice. Of course, you can use the tenant’s security deposit if they do serious damage, but even that may not cover the whole cost.

It’s best to be prepared for the worst, rather than hope each tenant will leave the place spotless.

Deciding if It’s Worth It To Be a Landlord in NYC

Many real estate investors choose to become landlords and ride out market fluctuations. Let’s explore the pros and cons of doing so.

The Pros of Being a Landlord in NYC

  • Competition can be good. There’s no question that finding real estate deals in New York is hard. It’s a competitive market. So if you can find a great place in a great location, you have a good chance of being able to ride out the ups and downs. Of course, it’s tricky to cut the competition. But if you can do it, you could have a source of income for years.
  • You’ll get passive income. Making passive income from a real estate investment is the dream of all investors. The idea is that once you have tenants, you’ll have a source of monthly income. And in NYC, those incomes can be very high—potentially thousands of dollars each month.
  • There are positive tax implications. Landlords can take advantage of tax implications for things like renovating the property; having a home office; and a home’s value depreciating.

The pros can make being a landlord in NYC worthwhile but there are also cons your should take into account before making a decision.

The Cons of Being a Landlord in NYC

  • There are a ton of rules. Because this is a city of renters and lawyers, there is a complicated tangle of rules regulating the rental market. Co-ops and condos have different rules. Subletting is regulated by the city, not just by whatever the landlord decides. And don’t forget rent stabilization. You’ll almost always need a lawyer on retainer.
  • Tenant protections. Tenants in rent-controlled apartments have always had a lot of protections. But for the last decade, it’s been almost the same for renters in market-rate rentals. Landlords can only take a one-month security deposit, for instance, and you have to present an itemized security bill, which means taking a complete walkthrough before anyone moves in. That can be a lot of work, and not everyone can stay on top of it.
  • Maintenance is constant. Everyone loves the old buildings in New York… except for when the radiator breaks (which it probably will); trash isn’t picked up (which it likely won’t be); or anything else goes wrong. This can take up a ton of your valuable time. Ultimately, the cost and time of doing maintenance will impact your profit.
  • The struggle of finding and keeping good tenants. It seems like it should be easy to find tenants. After all, everyone in NYC is looking for a place. But you might not always get good tenants. For better and worse, as we know, NYC has strict tenant rights. You could be stuck with a terrible tenant for a long time, or you could manage to not keep the good ones. It’s can be frustrating and impact your operating income.

The Bottom Line

I’m not going to tell you what to do. But after taking all of this into account—based on my own experience—it isn’t always worth it to buy and hold a property for passive income. Instead, I buy a place, fix it up, and sell it.

This works for me. I don’t have to take on the risks of being a landlord. Instead, I deliver a slightly-upgraded house to someone else who wants to take that risk and I can usually sell it for a higher price than I purchased it since the upgrades impact how my buyer calculates their CAP rate. I get more cash and get to keep finding houses to purchase.

You can too—with the right property.

Challenge 6: Interest Rates

What do interest rates have to do with anything? Plenty. When rates fall, it’s often cheaper to buy than to rent, and so the demand for your unit(s) might drop. Lowering the rent to remain competitive can put a real crimp in your ability to make a buck.

You’ll probably need to take out landlord insurance—no, your regular homeowner’s policy isn’t sufficient—and that’s another item in the ongoing expenses column.

How to become a landlord

Being a landlord can take many forms.

As a property owner you can be almost entirely hands-off, letting others do nearly all the work for you. Or you could be your own boss and substantially build your net worth. Indeed, you may even get rich over time.

To succeed, you’ll need to:

  1. Finance your new rental property
  2. Work hard (or pay someone else to)
  3. Plan ahead, even if you didn’t intend to become a landlord
  4. Ask for help when you need it
  5. Learn and follow the laws around rental agreements
  6. Market your properties to tenants
  7. Evict bad tenants when necessary

Let’s take a closer look at what you’ll need to do at each stage of the process.

Challenge 3: Finding Tenants

The Internet provides a fast and inexpensive way to find prospective tenants. You can also sign up with a real estate company that will vet tenants for you. In some towns and cities, realtors will show an apartment on behalf of the landlord for a commission on the rental. Another way to find tenants is to share this information with friends and family members who may be able to make recommendations.

When you vet tenants yourself, you will need to conduct credit and background checks, which can be expensive, but often is a smart idea.

Responsible tenants pay their rent on time, don’t abuse the property, and don’t require you to engage in the costly and time-consuming eviction process.

Conclusion

I think back to the days when we acquired our rental properties and wonder what we were thinking. Did we really think it would be easy? Were we that naive? Did we have a long-term plan at all?

Luckily, I don’t worry about it too much. I don’t regret buying our properties, and I think it was one of the best decisions we have ever made. While being a landlord can be stressful and expensive, I believe that the future rewards will be worth it. Our two rental properties will be paid off in approximately 14 years…right in time for our two small children to begin college. We could use the rental income to pay for our children’s education. We could use it to pay for their living expenses while they study. If they go to college nearby, we could even provide them with a free place to live while they pursue their schooling. Once our kids finish school, the nearly $2,000 per month in rent will be ours to save or invest. The possibilities are endless.

Owning rental property can be stressful and difficult. It can test your patience and even your faith in humanity. Yet, I think it is definitely worth my time and effort. While it certainly isn’t as passive as we imagined, I believe that our properties were a great investment and have no regrets at all. Is it worth it? I say yes.

Maintenance Expenses

As a landlord, you will be in charge of covering all maintenance expenses, with the exception of those incurred by the tenant at move-out.

For example, if the stove goes out, you have to pay for that repair. You also have to be prepared to cover emergency services. Let’s say you rent someone a one bedroom, one bath apartment, and their toilet breaks. You have to fix the toilet immediately. But in apartments with more than one bathroom, the repair is less urgent.

Failure to make emergency repairs could be a violation of the housing code and could result in costly fines.

Legal Costs

No one likes to think about legal costs, but they’re a reality for a lot of landlords. For most landlords, the reason they need a lawyer is that they have a tenant that needs to be evicted because they haven’t paid their rent or is failing to abide by their lease.

Eviction is expensive and can be a long and drawn out process. It starts with serving a “pay or quit” or “cure or quit” notice on the tenant and giving them a time frame in which to pay past due money or fix an issue. If you are unfamiliar with the process in your state, be sure to get a lawyer to guide you through it so it doesn’t take longer or cost more than necessary.

Lawyers can also serve as collection agents when a tenant moves out and doesn’t pay for repairs or has past due payments.

8) Its ALL on you

It doesn’t matter whether you use a letting agent or your mum to run your affairs, because if anything remotely inconvenient occurs, the responsibility will ALWAYS navigate its way back to its rightful owner. The burden is permanently fastened to your ass like a cluster of haemorrhoids.

I don’t know if it’s down to genius marketing, deception or just pure stupidity (perhaps a combination of all three), but many landlords think they can pass their responsibilities onto a letting agent and void all accountability. Unfortunately, that’s not going to happen, not even if that’s how the agent packaged and sold the deal.

A letting agent is NOT going to stay awake at night chewing their nails off, worrying about your tenant’s spiralling rent arrears issue. It would be nice if they did just to prove they’re not entirely soulless, but they won’t. They’ll probably just rub their greasy mitts together and use it as an opportunity to up-sell their eviction services. You’re the one that’s going to worry and pay through your nose to get the situation repaired, no one else.

Similarly, if you fail to meet your landlord legal requirements, who do you think is going to get persecuted? Your agent? That would be super cute. But no. You.

4. Ask for professional help when you need it

A lot of new landlords think they can do all 12 tasks on the above list. Of course, some succeed. But others just can’t find enough hours in the day, especially if they still have another job.

Many landlords hire professionals to help with property management instead of going it alone.

Indeed, some choose to call in full-service property management companies that will handle everything. The extent of property management costs depend on your local market, the tasks you want to avoid, and whether you rent short-term or long-term.

In the U.S., long-term rental management ranges from about 8% to 15%. But short-term properties in resort areas can cost as much as 50% to manage!

Every week (or even more often), the place will have to be cleaned, linens replaced, reservations taken, and rent collected. And you’ll face the same maintenance tasks required of a long-term rental.

Choose from the menu

Full-service property managers are simply too expensive for many landlords. So they view the task list as a menu. And they choose the things they personally can do well and outsource the others.

Those who are handy around the house take on any routine repair jobs. And those with genuine construction experience might be able to provide virtually all the labor a home will ever need.

Meanwhile, others may be good at administrative tasks, have great people skills, or a flare for marketing rental properties. The important thing is to play to your strengths when selecting the tasks you’re going to do.

Don’t take chances

The golden rule is not to pretend you’re good at things when you’re not. Don’t feel bad about your limitations. Because we all have them.

Some people are hopeless at maintenance tasks; others could never bring themselves to read or write a legal document. Some are natural accountants and others aren’t. Some can charm anyone while others stand no chance of facing down a troublesome tenant who’s late with rent or breaching a lease.

So remember the old saying: “Don’t trip over dollars to pick up pennies.” In other words, don’t crash your business to save a few bucks. In particular, if you’ve any doubts at all about legal issues, hire an attorney.

Being a landlord on-site vs. remotely

If you occupy one of the units in a building you own, you might enjoy some real advantages. Nobody could keep a closer eye on their biggest asset than you will. Your commute will be unbeatably short. And living on site could offer you more financing options as well.

But being on the premises has decided drawbacks. To start with, you need to keep some emotional distance from your tenants. Become friends with them, and it can be difficult to resist their pleas to pay the rent late or ignore late fees. And they may pressure you to let other rules slide.

Meanwhile, your proximity can be a double-edged sword. Do you really want people knocking at your door at all hours to complain about minor problems?

One way around this is simply not to tell anyone that you own the building. Use a property manager to run the place. And make the business into a limited liability company (or some similar vehicle) so your name doesn’t appear on leases.

What you should know before becoming a landlord

Take it from an average landlord that’s been scratching around in the game for several years, being a landlord is actually hard work and it can be extremely exasperating, even for an energetic playboy such as myself. Not consistently hard, but periodically. But those periods are some of the worst I’ve experienced in a professional capacity, and believe me when I say they come around far too quickly. The money definitely doesn’t come easy, and there are easier ways of making a lucrative living that’s attached with far less stress.

On a side note, screw those people that tell landlords to “get a real job”

I’m one of those chumps that got suckered into the game after watching one too many episodes of Sarah Beeny’s Property Ladder. If you remember the programme, you’ll recollect how excruciatingly painful it was watching the world’s biggest idiots making a killing from their restoration projects. To me, that made property seem like a viable option. If they can do it, I certainly can. Probably.

I didn’t have the time or testosterone to develop, so buying properties in ready-to-let condition seemed like the natural and easiest entry point.

In hindsight, as much as I loved Property Ladder and Sarah Beeny, it really shouldn’t be the sole reason for inspiring anyone to enter the property profession, because the truth is, most of the series was filmed during a booming market, so most of the participants could have purchased properties, sat on their arses getting blitzed off their tits on crystal meth for several months, and still made a killing.

But at the time, it looked fabulously easy. And there lays the problem, being a landlord just looks too damn easy. How difficult is it to put down a deposit and then get a conveyor belt of 9-to-5 sweatshop monkeys paying off the mortgage over the course of 20 odd years? We’re really onto something here. Rinse and repeat. Easy.

However, from my experience, the following pitfalls hold true…

To rent or not to rent

When it comes to creating passive income through owning a rental property, there are obviously going to be some upfront costs. For instance: buying a rental property. This might disqualify some folks with bad credit, but not as many as you might think.

With secured loans like a mortgage—which is backed by the very real estate you are purchasing—there is a lot more security for the lender than there would be with an unsecured personal loan. Now, a low credit score would mean higher interest rates on your loan, so you’ll want to be extra careful when evaluating whether owning a rental property makes sense.

Here’s where handyman skills can come in, well, handy. Buying a lower-end or foreclosed property and then fixing it up yourself could lead to a sizable increase in the property’s value. All of a sudden, the rent you’re able to charge is well above what you’re paying on your mortgage.

If there are a lot of empty houses in your neighborhood, you might be able to get one of them for a song. And if you live near a local college or university, renting out to students is always an option.

Again, owning a rental property—or even renting out a spare room—isn’t going to work for everyone. But if you’re up for it, you should definitely do the legwork to see if it’s possible.

Summary

Being a landlord comes with a lot of responsibilities that require both your time and your money. But, if you choose the right home to invest in and have enough money saved up for emergencies, being a landlord can make you a lot of money, and even offer you a full-time job.

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A landlord that treats rentals as a hobby:

  • Loses receipts and doesn’t track expenses
  • Does an average job on listing the property, and therefore attracts sub-par tenants
  • Does not track rent payments
  • Feels stressed, gives up and quits being a good landlord

Managing rentals is a business and an investment, not a hobby: Until you approach your rentals as a cash flow business, you will always be making poor financial decisions.

The real difference: Successful landlords use tools in order to avoid mistakes and most importantly, free up more time to hunt for new investment properties.

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