Ready to be a Landlord?
Many fortunes have been made through investing in real estate, and many landlords have turned their sidelines business into lucrative full-time gigs. Whether you are looking for a way to diversify your portfolio or build wealth for the future, investing in rental properties can be a smart move. But are you really ready for life as a landlord, and all the frustrations and responsibilities that it can bring? Before you start shopping for investment properties and looking for tenants, you need to ask yourself some critical questions first. Here are 5 essential questions you need to ask yourself before becoming a landlord.
Am I Prepared for the responsibility of being a landlord?
This is perhaps the most important question you need to ask yourself. Some people are perfectly happy being landlords, and more than willing to fix leaky toilets and repair broken sinks in the middle of the night. Others live in dread of those calls and quickly find out that being a landlord is not all it is cracked up to be. Owning a rental property and building a real estate empire may seem glamorous, especially to those who do not currently hold such investments. Before you join the fray, you need to take a step back – and take a realistic view of all that it entails.
Do I know how to screen potential tenants?
A single bad tenant could destroy your dreams of owning your first rental property, and finding suitable tenants is not an easy thing to do. Whether you plan to screen your own tenants or hire a firm to do the work for you, it is important to learn the ins and outs of what makes a good tenant. You will also need to know the provincial laws governing tenant selection. Housing discrimination is illegal, and rejecting tenants on the grounds of race, religion, sex and so on could get you in big trouble. Have a plan in place before screening tenants because you will need to do your homework before you move forward.
Do I have a contingency fund in place?
Even the highest quality rental property is bound to experience a few bumps along the way, and when you own the property, you are responsible for all the repairs. Before you buy a single piece of rental property, ask yourself if you have a contingency plan in place, and if that fund is sufficient to cover common repairs. Having a contingency fund of several thousand dollars is a good start, but it may not be sufficient to cover all your costs. If the rent roll is a good one, you can set aside part of that income to prepare for the inevitable repairs. Otherwise, you might want to put off your purchase until you have a solid real estate emergency fund in place.
What will happen if the property stays unrented for an extended period?
This is one that many first-time landlords fail to think about. It is also a question that experienced property managers understand all too well. Whether there is a serious housing shortage or a glut of rental properties on the market, sooner or later the property will end up sitting idle. If you are lucky, that period of idleness will last only a week or two. If you are unlucky, you could be facing an empty rental property, and the absence of rental income for an extended period of time. Having a plan and knowing what to do when that happens could mean the difference between investment property success and a terrible failure.
What is the real appreciation potential of the property?
The rental income is only one part of the potential return from an investment property. The other half of the equation is appreciation, and a strong increase in the resale value of the property can turn a ho-hum rental property into a real winner. You will, therefore, need to assess the income-producing power of the property based on two distinct criteria – the anticipated rent roll from the tenants and the expected capital gain should you choose to sell. Whenever you look at an investment property, you need to ask yourself about the potential increase in value. Since real estate is location dependent to a large degree, the nature of the neighborhood will matter a great deal. You might score a great bargain on an apartment building in a bad part of town, but buying into those kinds of problems could limit your appreciation potential down the line.
Owning an investment property can be the road to riches and financial independence, or a source of endless headaches and frustration. In the end, your readiness to be a landlord, with all the benefits and problems that title entails, can mean the difference between success and failure.