By Freddie Taylor
According to Merriam-Webster’s online dictionary, a ”Landlord” is the owner of property (i.e., land, houses, or apartments) that are leased or rented to another. The term “landlord” is from feudalism, the system of political organization with strict division into social classes and a formalized landholding system. Under feudalism, Overlords granted use and protection to the user of the land. It is this concept of the Overlord that mirrors that of the modern day landlord.
Today, landlords own assets such as real estate, while passively achieving the American Dream, or so many think. The question at hand is, “Is it for You?”
Let’s delve into this question by examining the upside and drawbacks of owning rental property and joining the Landlord Nation.
THE UPSIDE:
1. Cash
Total Rents – Mortgage Expenses = Positive Cash Flow
The total rents collected minus the mortgage and expenses of operation and maintenance equals cash flow. This cash flow is calculated and received each month, thus creating residual income for the landlord. (It is possible to have negative cash flow.)
An obvious benefit of cash flow is additional money every month that can be as easy to get as a cash advance. However, the primary benefit is that it pays for the property due to the collection of monthly rents.
2. Appreciation: Rising Real Estate Values
Appreciation is an increase in property value. Appreciation occurs when a property is purchased for say $100,000 and, four years later, that same property is worth $120,000. This property is said to have appreciated $20,000 over the past four years.
Real estate tends to increase depending on a variety of factors. Several of these factors include property condition, improvements, supply and demand, neighborhood revitalization, transportation, and economic opportunities. However this is not an absolute statement, values can decrease.
For example, the average property value of a single family dwelling on the Westside of Chicago has risen considerably over the past five years. (This includes the neighborhoods of Austin, Humboldt Park, Westown, West Garfield Park, East Garfield Park, Near West side, Lower West Side, North Lawndale, and South Lawndale)
3. Leverage: You Can Borrow Against it
Financial institutions view real estate as a sound investment and are willing to lend money to people and businesses who are willing to pledge real estate as collateral for a loan. According to Tirrell Robinson, Commercial Lender for Banco Popular, “Lending institutions are more lenient to accepting proposals where real estate is pledged as collateral.”
4. Tax Shelter & Benefits
In addition to deducting your interest payments, landlords are able to deduct the cost for all of their expenses associated with their property on their tax returns. This can amount to a significant savings on their tax bill.
In addition, the depreciation of the components of the property can be adjusted for tax purposes as well. Depreciation is expense recorded to reduce the value of a long-term tangible asset, such as real estate. (It is always best to seek the services of a tax accountant or professional.)
5. Transferable
Real estate ownership can be moved from one party to the next. A landlord that has spent a lifetime accumulating profitable properties, leases, and wealth can easily transfer the ownership of their portfolio to the next generation, thereby keeping all the lease agreements, and tenants in place via trust accounts, foundations, and wills. (Again, see your tax professional for more information and proper usage.)
DRAWBACKS:
1. Maintenance
Maintenance is a necessary function of joining the Landlord Nation. This aspect of the business can be a nightmare for the unprepared. The phone calls in the middle of the night to fix leaky faucets, squeaky doors, or replacing light bulbs drive many away from the rental business. Property is your business. It must be maintained.
2. Capital Expenses
Capital Expenses are large payments necessary to maintain a property. For instance, one of your properties may need a new roof or windows. The bottom line is that a landlord must have access to large amounts of cash. The landlord must have enough money to repair potential damages. Damaged properties don’t rent. If there is no one paying rent, you are losing money.
3. Problem Tenants
Everyone has heard stories of problem tenants. This can be a major deterrent for investors considering the Landlord Nation. A landlord interviewed at eviction court said, “The reason I’m selling my properties is because of Nightmare tenants. They wouldn’t pay their rent and they tore my place up. I have had enough of that.”
Problem tenants can do more than not pay rent or cause damage to your property. Other landlords reported problems of domestic violence, drug trafficking in their properties, and lawsuits. Yes, tenants will sue the landlord.
4. Evicting Tenants
I can hear many of you saying, “If they don’t pay me my rent, I will just evict them.” Are you sure you can?
The City of Chicago has some of the toughest Landlord-Tenant Laws in the country. Before you become a landlord in any city, you should reference the local Landlord-Tenant Laws.
Even if you have a good reason to evict a tenant, it can be a long process that can become rather expensive. There have been eviction horror stories that tell of evictions lasting fourteen months. In Cook Country there is a moratorium on evictions for a specified period of time during the winter months. Therefore, landlords cannot evict tenants during this time period because of the cold weather.
Be advised that the mortgage must still be paid even though you are not collecting rent, but you are incurring legal bills. To add to your frustration, the tenants may be damaging your property, and the whole time you are feeling that they are there just to spite you.
5. Administrative Work:
Sloppy administrative duties can lead to lawsuits, loss of money, and vacant properties. These duties are sometimes just too much for the average person to do alone. Solid record keeping is imperative.
The question remains, do you want to be part of the Landlord Nation?
You have to answer this for yourself. Go over the upside and drawbacks based upon your particular goals, abilities, and dreams.
Although I cannot answer this question for you, I will leave you with a story of a woman by the name of Rhonda. Rhonda is a veteran real estate investor in the Chicagoland area. Over her 20 year career, she focused on buying, renovating, and selling property. She is known as a rehabber. Rehabbers receive lump sums from the selling of a property.
According to Rhonda, the problem with this strategy is that if you are not selling properties, you are not making money. There is no autopilot. Rhonda who has arrived at the midpoint of her investment career, has noticed that her friends that have a history of investing with her have purchased million dollar homes, and they have allowed their inventory of properties to pay for those homes.
Is the Landlord Nation for you?
Today, there is a vast inventory of rental properties around the Chicagoland area and landlords are living off of the monthly cash flow that has come from a lifetime of diligent investing. They dealt with all the problems and challenges associated with being a landlord. These enterprising individuals utilize property management companies to make their dreams come true.
***********************************************************************
Freddie E. Taylor, MBA is the owner and Certified Residential Appraiser with Appraisals By Taylor, Ltd. Email questions, comments, and suggestions to ftaylor@abtchicago.com.
