So You Want to Be a Landlord? at Yahoo! Finance confirms my perspective that rental income is not "passive income." Being a landlord can be the equivalent of working at a job. One needs to find tenants, evict bad tenants, maintain the property, and repair things that break. In addition, one needs to find good properties, and sell them, eventually.
To note, I am not saying that real estate is a bad investment. In fact, in Lessons From My Dad - Create Guaranteed Income, I note that real estate has been a terrific investment for my parents. My point is that rental property can be a high maintenance (no pun intended:-) investment. It can also create lost of headaches and lots of stress if one dislikes the type of effort needed.
On the other hand, hiring a good property management company can turn a high effort investment into a low effort investment. My parents' trusts own rental property that is handled by a property management company for about 5% of the rents plus expenses. This investment has been relatively low effort and stress free for them. In addition, the net income is a major part of their retirement income.
If I do get into real estate, I will be looking for similar types of property, which can be handled by a management company. I believe the best place to look is commercial real estate. When I was actively searching, I didn't find any. Perhaps during the current real estate downturn, some deals can be found.
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This is not financial or real estate advice. Please consult a professional advisor.
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5 comments:
I own four single family rental units and can attest that it's a lot of work, particularly when you first get started. Once you have a list of companies/individuals that can assist you with financing, rehab and maintenance, however, it gets much easier. You also learn a lot along the way. For example, advertising for a tenant for my first rental unit cost me over $500. The last unit I rented cost me $38 in advertising. Live and learn.
My family has rented an apartment we own for 4 years to the same tenant now and would you believe that there have never yet been any major issues to speak off. I guess we were lucky to get those folks as tenants. As it mentions on the Yahoo Finance page we have decided to keep them in instead of taking the risk of new tenants even if they are ready to pay slightly more rent...
I've only done one house so maybe i never got to Doug's status where it gets easier. I would say it was a good experience, but my job takes a lot of time and I'm not willing to take more time away from my family to maintain the house, check the furnace, paint, repair and deal with the other headaches. It seems the majority of the profit in rental property results from putting your own time into these jobs, otherwise your margin is squeezed by paying painters, remodelers etc. Not that I have anything against the hard work. I just found I could be more productive elsewhere.
@Dough Roller,
Sounds like real estate has been a good experience for you. Four houses and expenses getting lower is a good place to be. Congratulations.
@Raj,
Agree that a good tenant is worth keeping. My dad typically kept rent increases at 1/2 the CPI to incent his good tenants to stay.
@Zach,
Your comment made me remember a point I had heard in a real estate course I took. The instructor explained the best way to build equity was through "sweat" - i.e. doing the work yourself.
Thanks, your post really help me a lot. I'm learning to get into real estate and try to surfing to find an article just like yours.
Ronald,
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