Are you Landlord material?

Being a landlord is not the easiest thing in the world. Many of us become landlords by choice, but others become landlords out of necessity. For those in the latter category, it is a varied and difficult road they travel before becoming a landlord. With today’s economy, there are larger numbers of families who must rent, than there are people who are not only willing to buy a house, but are able to qualify for a mortgage. This deficit of homebuyers is a hot button topic not just for our nation, (housing is one of our major job producers), but it is a critical issue for anyone who is trying to sell their home. This national deficit of homebuyers has resulted in families who would never have thought of becoming landlords, doing that very thing.

Before you consider taking your home and renting it out to a stranger, you need to be aware of what a Landlord really is and what his responsibilities are. A word of caution, each state has its own laws regarding property rentals and you should become very acquainted with these laws before you enter into any agreement with a prospective tenant.

A Landlord is most often your neighbor who for one reason or another has entered the property management business (i.e.: home rental). They are the people who have risked their capital, credit and good faith with a banking institution with the promise that they will repay the loans they have acquired. Landlords are the ones responsible for the upkeep, taxes, insurance, (building only – fire & flood), general repairs, bookkeeping, landscaping, writing of leases, and the general all around go to guy whenever there is an issue with the home. In many cases, they have invested in upgrades, (fencing, tile floors, etc.), whose ongoing attractiveness is utterly dependent upon their new tenants.

So you ask, if someone is a Landlord, are they not rich? In a word, no, there are people who have a number of properties that they rent, but unless they have paid off the notes for those properties, they are not making the money you would think they do. For example, a nice three bedroom / two bath home will sell for about $125k in most parts of the country. Using an average interest rate of 6%, a 30 year loan will generally cost $700-$750 per month. Once you add property taxes, insurance, and general maintenance costs, you will spend another $200 per month, bringing the total costs for that home to between $900-$950 per month. How much can he rent that home for? In Southeast Georgia, most homes of this type will rent for $1200 per month. Leaving the Landlord a gross profit of $250-$300 per month. For arguments sake, I will use the lower cost, giving the Landlord a gross profit of $300 per month. Though that sounds like a lot, ($3600/year), there are still additional costs that do occur from time to time. The first of these costs will be personal income taxes. These will run at the rate of a low of 15% to a high of 30+%. Then, whenever there is a need for a plumber, electrician, new carpeting, etc., the profit shrinks even more. That’s not much money ($2-3K), for the work required. Furthermore, that is assuming the home rents on a continual basis, which quite frankly, is not a realistic scenario. A rental home rarely rents for more than 18 months consecutively.

What can a Landlord expect from his tenants. Quite a bit actually, mostly issues. Yes, there are a number of tenants who will keep the home they rent in better condition than the Landlord himself did when he was living there. Furthermore, I would contend these people are actually in the majority in this nation, but as any Landlord will attest, it only takes one bad tenant to really ruin your day, month, or year. For example, in California, once a tenant takes possession of the home, whether or not they have paid the rent/deposit, it can take up to six months before you can evict them from the home. This is why so many Landlords will ask for references, where you last lived, perform a credit check and will be a general pain before they approve your application. Somewhere down the line, they have had a bad experience.

In my family’s experience, we have had bad as well as good tenants over the years. We currently have 8 rentals ranging from simple a 1-bd/1bath, to a 4-bd/3 bath that’s out in the sticks. The best tenants will always call on the first of the month, pay in cash, (checks seem to bounce too often), and generally won’t have any significant issues. Others, have lost the doors to their stoves, busted holes in the walls the size of a human body, ripped their front doors off the hinges, well I could go on for a while, so let me say that some tenants have been a real challenge. Of course, the funniest tenant was the one who called late one night to say that there had been an explosion in their home. We were quite concerned as the house had electric heat and we could not figure out how it had exploded. So my father raced over expecting to see the Fire Department on the scene. Needless to say, when he got there, not seeing the Fire Department or Police, he knocked on the front door. The tenant answered and after seeing the expression on my father’s face, quickly showed him what had exploded. Apparently the light bulb in the refrigerator has blown with a pop, scaring him. Later, we had a good laugh, but this type of behavior is not all that uncommon with some tenants, the trick is to figure out how to sort out the wheat from the chaff.

Being a Landlord can be a rewarding experience, but as with any job, there are good days and bad days. The best we can hope for, is to prepare as best we can, and pray that we have made the right decisions. If you are planning to become a Landlord, I would strongly suggest that you do your homework, take pictures, and visit your tenants often.

Enjoy!