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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. 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.
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.
Is the Landlord Nation for you?
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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. |
