Why Become A Landlord?

qmmSo you think you are smart enough to become a part-time landlord. Great! I’d advise thinking through a long-term plan way before pulling the trigger. For example, do you plan on building a portfolio of similar units, or do you just want to buy this one? If you just want one, save your $ and invest in mutual funds.

If you want to build a portfolio, consider what you envision it to look like in the future. In my experience, using a management company is not a good idea, especially for long-term investing, as they continue to earn off the top of your profits when all of the hard work (leasing, turnover) is already done. It’s counter intuitive to me as an investor looking to maximize edges to pay a company to literally do nothing a high % of the time. Not to mention that there isn’t a management company on earth that would pursue a leasing campaign as aggressive as the owner himself.

That means keeping management in-house, which will maximize your return and could be the difference between a profitable investment or not. In-house management isn’t as hard as you think and maintenance can be outsourced (one of my companies specializes in this specifically for smaller landlords). Setting up a simple, turnkey management operation from the start is paramount to building a successful portfolio of rentals.

Ultimately, ask yourself why do you want to become a landlord? It’s an active investment (even if you use a management company) that has a much higher risk of downside than a passive investment like a solid portfolio of mutual funds. Mutual funds may return 10%-20% over a 20 year period and they will never spontaneously require an $8,000 new roof or $26,000 of new siding and they won’t ever pay their rent late or destroy your property. In my opinion, the ROI for a rental property needs to be much, much higher to compensate us for the increased risks that go along with owning real estate. I don’t know if there has ever been a 20 year period in which the market has lost money, whereas the potential downside in owning real estate is such that a few mistakes can take years to recover from, completely negating any potential future profits.

I don’t mean to be a downer or to scare you from pulling the trigger! I’ve been asked about this a number of times over the years and I have owned real estate professionally for over 15 years. Before making any investment be sure you have a competent attorney on your side and be sure you have a full understanding of what you are getting yourself into! Missing a good deal is much better than buying a bad deal.

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About donniccolo

Logic. Common Sense. Open Minds. www.nicknicastro.com
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