So you’re thinking of becoming a landlord?

If you’re reading this you’re considering renting out some property or buying property to rent. Maybe you want to start collecting rent instead of paying it. Perhaps you want extra cash in addition to your other gigs. Or maybe you’re moving to a new city and not excited about selling your house in the current climate. Or maybe you’re contemplating your first move in building a real estate empire. Great! Although there are many factors to weigh. I’ve put together this guide as a starting point, which distills my experiences as a landlord.

The Upsides of Renting Property

Money - The biggest reason to rent is of course the rental income. You might find that in the current climate, with property prices and interest rates low and rental rates fairly stable or increasing, that your rental income will cover much or all of your mortgage payment. That’s nice. When you look at a property to purchase that has been rented in the past, the seller may be required to disclose their yearly gross rental income. This can be useful, but take it with a grain of salt. Perhaps the seller is really good or really bad at attracting tenants or just dishonest (inflating the rental income drives up the price). But you can pretend you’re a renter and do your own research on the local market using craigslist or other sources. As a side note, many don’t know that if you will occupy a portion of the property in question, you still may qualify for an FHA loan, which, amongst other benefits, has a lower down payment. And this possibility is open for properties up to four units.

Tax Benefits - The big deductions are of course mortgage interest and expenses relating to your rental activities.Repairs and maintenance costs that can be solely allocated to the rental portion of your property can be fully deducted. Whereas if you live in part of the building, costs for the whole building, such as roof repair can only be partially deducted. And costs of maintenance and repair in the portion you occupy cannot be deducted. Major improvements, above and beyond maintenance, such as adding a deck or garage, must be capitalized and cannot be deducted. But in general, if you live in the home you own and rent a portion of it, this will improve your tax situation.

Fun – The more intangible benefits include meeting potential renters, the thrill of marketing and selling your rental property, choosing paint schemes, problem solving, DIY projects. Some people love this sort of thing and I’ve found I like the both the social side and the repair and maintenance side more than I thought I would. I’ve learned a lot of new repair and DIY skills and I’ve discovered I’m fairly good at marketing and selling the property. Owning a rental property is basically like owning a small business, you can to a great extent control its fate.

The Downsides of Renting Property

Expenses - your expenses will go up. For example if you own a duplex and live in one unit, you must maintain and replace the appliances in the other unit as well as your own. In a duplex you may have two furnaces, two water heaters, two sets of washers and dryers, which all need to be maintained. The upshot is that you need to be realistic and prudent when you evaluate a particular rental property’s income vs. expenses. Will the roof need replacing in five years? How’s the foundation? Have there been flooding issues in the past?

Tenant Transition - I’m listing tenant transition as a separate item because I’ve found it to be the most time intensive part of being a landlord. So, your current tenants give their notice. The clock is now ticking and you need to find new tenants. You need to post on craigslist or apartment listing websites or something called “the newspaper” with an ad (like every aspect of being a landlord, you can hire this task out, for a price). I find that of all the responses I get initially, only about half actually end up making an appointment. Of that group about a third cancel the showing and about half of the folks who see the apartment actually apply for the apartment. Of course your locale, price etc. will affect these numbers. So, you have to handle all these communications, be available for showings, which while short can really break up the day. You need to make an effective case for each appointment why this person or group should rent from you. A proper application process is also needed, perhaps a background and credit check, employment verification, etc. Many cheap websites exist to farm out the background and credit checks. The other important time period is the two or three days when your old tenants move out and the new ones move in. The landlord needs to make sure the apartment is ready for the move in of the new tenants. This may mean a frantic 24 hours of cleaning and or repairs if the previous tenants left a mess and you’re renting the apartment back to back. But after that you may have three or four months where your tenants have no issues.

Tax complexity - If you choose to do your taxes yourself you will have to learn terms like “capitalize” and how they apply to your rental property. Or you will need to find an accountant. The first year after you start renting a property would be the most effective use of an accountant.

You are always ‘on call’ - You may get a call in the middle of the night saying water is spraying everywhere. Perhaps someone suspicious is in the driveway or the power is out. Even if you have no control over the situation you may get a call, or text, or email, expecting some action. Can you handle that?

A few things, like snow removal, you do not have the luxury of waiting a day to shovel that walk as you might for your own home, as it would be unfair to your tenants (and possibly against code) to let it go that extra day. And of course if you own a home and also a rental property you have two lawns to mow, two driveways to clear of snow, etc. If you tend to mow your lawn like clock work, then you’ll probably be fine. But if you tend to procrastinate, you may need to put more effort in to completing maintenance in a timely way.

Tenants - You may have tenants that are too loud or otherwise behaving badly, or who can’t make rent. These problems, and there will be problems, even with the best of tenants, require you to get out those people skills and work through it. Are you up to working out problems that tenants have with you or each other or a lack of income? Of course you can hire out these responsibilities, but that eats into your rental income. And remember this is a business and your renters are your customers, you cannot treat your customers poorly without negative consequences to your business and your sanity. I’ve found that if you approach tenants in a respectful way a solution usually presents itself. Threats or immediately taking a hardline with tenants will rarely result in the best outcome for anyone. If you show a tenant you’re willing to work through a problem in a reasonable way they’ll usually be willing to do the same.

The tenant situation is especially important if you intend to rent out a room or two in your own living space. Is that really something you want to do? Share a kitchen, bathroom and living room? Do you want to hear them when they come home at three a.m. with someone they met at the bar? I think some of us believe the person that will rent our room will be a Mary Poppins sort who will insist on helping you cook, clean and generally get your life in order. This is rarely the case. If you live in a very desirable neighborhood and price your room right you may have plenty of interesting, stable tenants to choose from, but otherwise your pool of tenants might be rough around the edges.

Still excited? Being a landlord is doable by just about everyone. Information is out there for just about any problem you might encounter. Go look at some properties and see what you find!