Thinking about diversifying your investment portfolio? Many investors believe real estate provides a great investment opportunity and an easy way to develop a passive cash flow each month, via the rents they can collect from tenants.
And while buying an investment property can be a smart way to add to your assets and grow your wealth, potential landlords need to understand what they’re getting into before purchasing a rental and bringing in tenants.
It’s a lot of work and adds to your tax and legal obligations. Do your homework and don’t blindly leap into real estate with the assumption you’re diving into easy money.
Here’s what potential landlords need to know before purchasing their first investment property:
Owning a Rental Is a Lot of Work
You can make your investment property a source of passive income. But it takes a lot of work to get there first.
You need to be responsible for regular repairs, maintenance, and upkeep. If a tenant needs something, you’ll be the person they call (whenever they need you, regardless of your personal schedule).
You’re also responsible for keeping your tenants safe, which means looking into insurance and keeping the property in good condition so you’re not held liable for accidents. And when your current tenants move out, you’ll need to make sure the property is clean and comfortable for the next tenants you want to have move in.
You can cut down the amount of work you have to do yourself by hiring a property manager, but keep in mind this adds to your expenses.
And don’t forget — simply finding tenants and keeping renters in your property year-round can be work in itself. If you don’t have someone paying the rent, you’re not making any money. Keep this in mind when searching for your investment property. You may want to avoid vacation homes or units in any high-turnover area, as finding renters becomes even more work in these situations.
Bad Tenants Can Make Your Work Harder (and Your Investment Costlier)
Even if you have a leasing agreement or contract in place and you’ve taken a security deposit to cover damages, tenants can still cause a lot of trouble.
They can be demanding or excessively needy and they can completely trash a property. Bad tenants can cause issues with neighbors or even refuse to pay.
Think all your tenant problems can be solved with an eviction notice? Maybe — but not always.
The Law Isn’t Always on Your Side
That’s because in many states, the existing laws favor the tenant’s rights over the rights of the landlord.
Do your research and learn about the laws surrounding rental properties and your rights before your purchase real estate with the intention of becoming a landlord. Understand how your tenants will be protected, and what options you have for legal recourse should you ever need it.
And yes, while you can start the eviction process to remove a tenant who doesn’t pay or who repeatedly violates the leasing agreement they signed, it’s a long and expensive process.
It can cost you financially, in legal fees and whatever money you have to spend to fix up your property after a tenant has been evicted, and in opportunity costs. You lose the chance to earn your passive income every day a nonpaying tenant is in residence, or every day that you have to spend making repairs to a damaged unit before new tenants can move in.
Don’t Forget About Taxes
Becoming a landlord also changes your tax obligations. Make sure you’re familiar with how your tax bill will change, and understand what the IRS expects from anyone using real estate as a form of passive income.
You may need to factor in the costs of a good accountant and even a bookkeeper into your expenses for owning an investment property. Letting a professional handle the numbers is a smart way to ensure you don’t end up in trouble with the government or slapped with fines and penalties — complete with interest — if you don’t file your taxes correctly.
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