Becoming a Landlord

Wondering what to do when you inherit a house that you don’t need? What if that house still has a mortgage that you are now responsible for?

Becoming a landlord is one option that can deliver a steady stream of side income. While money is a big item in the pros and cons of becoming a landlord, it’s not all there is to consider. Here’s what you need to know if you inherited a house and are trying to decide if it makes sense to treat it as a rental.

Pros of Becoming a Landlord

Additional Income Stream
Whoever said there’s no free money wasn’t inheriting a house– mortgage or not. As long as you have tenants in the property, you can secure a reliable stream of income in the form of rent payments. These rental payments can cover expenses, such as property taxes and maintenance, plus a profit. An extra source of income is a positive thing because it helps you achieve financial freedom.

Freedom to Choose Your Career Path​

Owning a single investment property won’t replace your day job, but it can give you the freedom to choose your career path. If you love what you do, you can hang on to your day job and save that second income stream. If you want to switch careers or explore creative projects, rental property income can provide a financial cushion. This will allow you to explore other interests without the pressure of bringing in money to pay the bills.

Passive Income

While being a landlord isn’t always hands-off, many spend only a small amount of time on property management. This grants them a regular, passive income stream.

Landlord Duties

The amount of time spent on landlord duties varies by circumstance and rental property type. For instance, multi-family properties often need more hands-on time than single-family homes). If you’re trying to get tenants to rent the home, you may spend more time on “big-ticket” fixes like new flooring or countertops. If you already have reliable tenants, you may only need to worry about minor upkeep.

Property managers

Property managers can make being a landlord hands-off, for a fee or percentage of the rent. If you’ve inherited a house in another state, reliable property management makes it workable for you to keep the house, rent it out, and receive a steady stream of passive income.

Fund Your Retirement

A new study shows that Americans aged 55 to 64 — close to retirement age — have saved only 12 percent of what they need or a median sum of $120,000. A low six-figure retirement kitty won’t last long without paychecks coming in, even for those who are fortunate enough to receive a pension.

In your retirement years, you should be able to live the life you want. So if you don’t need the rental property income for day-to-day expenses now, consider stashing it in an IRA account where your savings can grow. Come retirement time, you’ll be set to live a life of ease in the manner of your choosing.

Sweat Equity

For a certain kind of person, being a landlord is fun because it gives you the chance to build sweat equity. Tackling home repairs and regular property maintenance can build confidence and instill a sense of pride in ownership.

Long-term property appreciation & Peace of Mind

Real estate is considered one of the safest forms of investment since (minor housing bubbles aside) home values always increase. When inheriting a house purchased decades earlier, you benefit from the long-term property appreciation of the home. Hold onto the home and earn passive income until you no longer want to be a landlord or until the real estate market heats up. Then sell for a premium. You can either invest your savings or buy a new rental property. This is the buy and hold strategy.

Owning a home brings peace of mind that you always have a place to go. If you own a primary home then this is less important. But if you’re a renter who inherited a family home, the fact that you now own a home that can’t be taken away from you (unless you don’t pay the mortgage or taxes) can powerfully transform your sense of security.

Talk to a licensed HomeGo agent today.

Talk to a HomeGo agent, and schedule a no-obligation walk-through today.

Cons of Becoming a Landlord

Bad Tenant Risk

Nightmare tenants may be the number one reason people stress about becoming a landlord. While they are rare, you should always know the risk and take steps to mitigate them. Bad tenants may pay the rent late, cause property damage, or violate your rules by (for instance) subletting the property or smoking in the house.

Some landlords worry about falling victim to nice guy syndrome. As a landlord, you need to take care of the property first and foremost, not be friends with your renters. Your rental property is a business. If you don’t think you will be able to follow up with tenants over late rent, collect on late fees, or address violations of the lease, then hire a property manager who can do these things for you.

You can decrease the likelihood of getting bad tenants by screening tenants, including checking credit scores. Risky tenants who have caused headaches for past landlords may think twice about applying to rent your property when they learn how diligent you are.

A strong, clear lease agreement is your first line if defense. A security deposit is your safety net to protect your property.
Legal Issues

As a landlord, you’ve got to follow state, federal, and municipal laws. If you breach laws, even unintentionally, you could be fined or face a lawsuit. These laws can differ from state to state. It’s important to understand the laws that apply to you and your tenants.

Maintenance and Property Management Costs
Maintenance and property management costs can take a chunk out of your rental income. Over the lifetime of being a landlord, you may need to pay for things like a new roof, minor kitchen renovations, bedbug remediation, or water damage repair. Even minor expenses, like lawn care or plumbing services, can add up.

The best defense against unanticipated maintenance costs is to save a portion of the rental income in an emergency fund which you can use for repairs.
Taxes and Hidden Fees
Taxes are one of the downsides of being a landlord that no one talks about. As a landlord, you will be taxed on the rental income you receive, which you must report to the IRS. You are responsible for property taxes and school taxes in the community where the inherited house is.

If the inherited house is in a condominium, townhome, or single-family HOA, you’ll be assessed dues. Dues, taxes, and other expenses must be factored into your rent rate or you will not earn enough to cover your expenses.

It’s not all bad news as there are many tax breaks for landlords, including mortgage interest deductions, mileage deductions, and the ability to depreciate property repairs.

Real Estate Markets

Flooded Market
As a general rule, single-family homes are more desirable among tenants than apartments, so they will have a higher valuation. However, all real estate is local. Regardless of national trends, you need to pay attention to the local market and how that affects your rental property.
Shortage of Rentals
If you’ve inherited a home where there’s a shortage of rentals, then you benefit from the lack of supply and high demand rate. Not only can you set a rental rate that benefits you, but you can be choosy about who you take on as tenants.
Selling
The real estate market also plays a role if you’re thinking of selling your rental property. If the market is down, you may be better off continuing to rent out the property until market conditions improve. Or you can sell the property (potentially at a loss) and move on. If the real estate market is tight and there are few homes for sale, then the time may be right to cash out.

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