Should We Become Landlords?

by Gary Foreman

Is becoming a rental property landlord a risky decision? We explore the pros and cons of buying rental property. Use these guidelines to answer ‘should we become landlords?’.

Dear Gary,
My husband and I both work and we own our home. We have been throwing around the idea of buying rental property, either a house or duplex, for an extra source of income.

What are your thoughts? Do you think it’s a risky decision? What are the pros and cons?
Isabelle from Cheyenne, WY

Whether you’ve ever purchased Boardwalk on Monopoly or not, there’s a good chance that you’ve wondered what it would be like to own rental real estate.

That’s understandable. Many people have made a fortune in real estate. Of course, many people have gone broke in real estate, too.

There are three major questions to answer in deciding whether to invest in rental property. How much can I earn with a rental property? Do I have what it takes to be a good landlord? And how do other options compare?

Appreciation: The significant benefit of real estate investment

Tracking appreciation of real estate is complex. Realtor.com expects values to appreciate at 3.2% for 2021 and end the year at about 3.4%.

Their projections vary considerably by region. There wasn’t any mention of Wyoming, but you might be able to find something for your area in a different study or report.

Remember that your results will probably be a multiple of whatever return occurs. Unless you’d be paying all cash, your real estate investment would be leveraged.

If you put 20 percent down, you’re controlling $5 for every dollar you invested. Leverage multiplies the results, positive or negative, of any investment. Anyone who has been upside down in his home understands the concept.

Related: Compare Mortgage Rates

Other real estate investment benefits

Besides appreciation, there are other benefits of investment real estate. The obvious one is that tenant’s rent should pay most of your entire mortgage, which means that you’re gaining equity on someone else’s money. This is always a good thing.

You’ll also be able to deduct money spent on your property from your income taxes. Plus, you’ll only pay taxes on appreciation once you’ve sold the property, and even then at capital gains rates in most cases.

In addition, real estate will never go entirely out of style. We all need a place to live, no matter the state of the economy. So except for rare exceptions, real estate will always have some value.

Disadvantages of investing in real estate

On the flip side, there are some disadvantages, too. The real estate market can crash like it did in 2008. In many markets, homes quickly lost 30% or more of their value. We’re still finding people who have zero equity in their property five years later.

Much of that volatility is reduced if you invest for the long term. Housing markets tend to level out if your horizon is ten years or more in the future.

Don’t expect a huge income unless you can pay cash or have a sizeable down payment. I can’t give you an average income figure for rental property. You’ll need to calculate that on each property.

The calculation will require some research on the property you’re considering. Besides your mortgage payment, find out how much property taxes and insurance will cost. Estimate how much you’ll need to set aside each month for repairs.

And, be prepared for an empty rental. It happens to most landlords occasionally. When it does, you’ll need to pay the mortgage and other expenses out of your monthly budget. Ensure that you have enough set aside to handle a reasonable period to fill your rental.

Personal factors to consider before becoming a landlord

You’ll want to consider more than finances. There are some individual factors to consider before you become a landlord.

Someone will need to deal with non-paying tenants and tenants damaging your property. For some people, especially those who don’t like confrontation, it’s challenging to set limits and force tenants to live by them.

Rental property requires active management. You or someone you pay will need to collect rent and be on call for repairs.

Related: Before Investing in Rental Property and Becoming a Landlord

Consider your other investment options

Before making a final decision, consider your other financial options. According to the Federal Reserve Database, as quoted in a NY University report, from 1928 to 2012, stocks (S&P 500) returned 11.2 percent annually (arithmetic average).

Long-term, either investment (stocks or real estate) will likely give you a reasonable positive return. But, with either choice, you’ll probably have some good years and some bad ones.

One way to reduce the risk is to balance your investments. For instance, if you buy investment real estate, make sure you have stocks and bonds in your IRA and 401k plans.

Remember that you don’t necessarily have to take possession of real estate to benefit from ownership. Real estate investment trusts (REITs) or other stocks/mutual funds investing in real property can offer many of the advantages without requiring you to be hands-on.

Finally, you might want to ask yourselves why you want extra income, especially since both of you are working.

It may be that what you want is asset appreciation, which could affect your decision. Or it could be that you need to adjust some other area of your finances so that extra income isn’t necessary.

Related:

• 4 Reasons to Take in a Renter and 7 Ways to Avoid Problems When You Do
• The Pros and Cons of Owning a Duplex
• Taking in a Renter for Extra Cash

Reviewed March 2022

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.