Sunday, July 5, 2009

The Way Not to Be a Landlord

I think there are smart ways of being a landlord, and there are stupid ways of being a landlord. It can be a huge blessing, or a huge curse that follows you the rest of your life! It is the largest purchase most of us will make in our lives, and so it deserves a lot of thought before we make this decision.

What bothers me is the thought that it is a good idea to buy a house or duplex that you cannot afford, and expect rent to come in to cover part of the cost of the home. The general argument is that the risk is worth the possible gain of what you would pocket from the rent.

Below are the reasons why I think this is not a smart idea:
  • When you are calculating risk, you always have to add additional risk when you take on debt. Taking on a mortgage that you cannot cover on your own without rental payment(s) adds an incredible amount of risk.
  • Being a landlord and a home owner is a lot more difficult and costly than it sounds. I very much want to be a landlord, but I don't want to risk my family's welfare if I get a bad batch of renters, or if there needs to be a lot of money put into upgrades or fixes to the rental property.
  • You cannot plan on being able to rent out the property 100% of the time and always have great renters.
  • Buying a house with a mortgage you can't afford is asking for trouble.
A much better scenario would be getting a mortgage that is less than 25% of your take home pay, and then renting out part of that house/duplex. This not only would decrease the risk of this scenario by a ton, but it makes a lot more sense. Getting property that would allow you to do this would most likely require a large down payment, which is why a lot of people do not pursue this method. The best option is not usually the easiest option.

We can't obviously live in a scenario where there is 0% risk, in that the unexpected will always happen. However, with a 3-6 month emergency fund, health insurance and term life insurance, we can decrease our risk factor dramatically. Making the right decision on getting a mortgage is one of the most important money decisions we will make in our lifetime.

I think a lot of people justify real estate purchases on a false "guarantee" that it is always a good purchase. There is no such thing as a guaranteed investment....even with real estate.

It is my opinion that the key to wealth is staying out of debt, and when you do go into debt for a house, get out of it as quickly as possible. From there it is easy to become a landlord with a lot less risk in the scenario!


2 comments:

  1. You are always have very good advice with money. I always enjoy reading your thoughts

    ReplyDelete