If you've considered becoming a landlord, you might wonder if it is worth it. There are many pros to renting out property. You’ll be your own boss and earn an income without working 40 hours every week.
But if you’re seriously considering it, you’ve probably wondered what landlords can do when tenants are struggling to find ways to pay the rent or how much money landlords actually make.
Here are the upsides and downsides of becoming a landlord that you need to know before you make a decision.
1. It provides passive income
Becoming a landlord can provide passive income for some people. Whether it is truly passive depends on whether you plan to hire someone to manage the property for you.
If you do go that route, you can remain the boss and let your manager take care of the rental process and any issues that might arise.
But remember you will have to pay a property manager about 8% to 12% of the rental fee you collect each month.
If you decide to take it all on yourself, you’ll need to show up for tenants when they call and handle finding the tenants in the first place. But you can collect money every month without going to work every day.
2. Expenses are tax deductible
As a landlord, the IRS still requires you to report your income. However, you can deduct many of the expenses related to renting the unit.
According to the IRS, landlords can deduct costs for necessary repairs and maintenance, mortgage payments, and even taxes from their rental income. Even costs related to advertising the unit are tax deductible.
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3. Rental properties are long-term investments
A rental property is a long-term investment that will help you prepare for your or your children’s future. Owning the property will provide you with options for how you make a return on the investment.
You can continue to rent out the property and bring in income even after retirement. Some landlords choose to sell the home or leave it to their children or grandchildren.
4. You’ll have flexibility
While you’ll still have some responsibilities, you won’t lose any income if you take time off. If you are sick or want to take a vacation, you will not need to worry about an angry boss or a small paycheck.
Some landlords even live in other states and let property managers handle the day-to-day tasks. So if you decide to move, you can remain a landlord if you don’t want to sell.
5. You can charge what you want (mostly)
For the most part, you can choose how much you want to charge your tenants each month. You won’t have to rely on a raise or promotion to increase your income.
Many landlords raise the rent for tenants once their lease comes up for renewal. This is important for controlling expenses as the cost of living increases.
However, some areas have rent control laws that might limit how much you can increase a tenant’s rent, so it is important to review state and city laws where the property is located.
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Reasons not to become a landlord
If reading all of the perks of becoming a landlord got you all excited, slow down. Along with the rewards of owning property come risks as well.
Let's take a look at some reasons why becoming a landlord might not be right for you.
1. Properties require maintenance and repairs
All homes require maintenance, and rental properties are no exception. Maintaining furnaces, air conditioners, and plumbing systems are only a few of the things you’ll want to do. Not maintaining a home can lead to more costly repairs.
When a furnace breaks or a pipe bursts, you'll need to have them fixed fast to avoid any legal problems. Leaving tenants without running water or heat in cold weather can result in painful fees.
2. You might face lawsuits
Although your tenants live in your rental property, and it is their home, you own the unit. You are responsible for keeping the home in a safe and liveable condition. It’s possible a judge might find you liable for events such as a robbery or fire.
You can help protect yourself from lawsuits resulting from unfortunate events by taking a few basic steps.
Ensuring the home meets security laws, providing working smoke detectors, and purchasing a good home insurance policy can minimize the likelihood of financial duress.
3. The tenant doesn’t pay rent
Steady income is not a guarantee for a landlord. Some tenants don’t pay rent. Whether they lose a job and can’t afford it or downright refuse, it is still lost income for you.
You might need to evict the tenants so you can rent to someone else. But eviction is a lengthy and expensive legal process.
Some evictions can take a year or longer. If the tenant is still not paying rent, you’ll lose a lot of potential income. A judgment in your favor for the amount owed does not guarantee a former tenant will pay.
To help avoid having to evict your tenants, ask for references and perform a credit check before they sign a lease.
4. Tenants can destroy property
A tenant might break windows, put holes in walls, or otherwise damage areas of the home. If the tenant refuses to fix these damages, you'll need to repair them before a new tenant can move in.
Tenants might also leave the home in need of extensive cleaning or leave large items behind.
In some states, landlords are required to store abandoned property for a certain period of time, which could cost you even more money.
5. Risk of vacancy
A rental property isn’t providing income if no one is living in it. Not only is there no one there to pay you rent, but empty units can result in bigger issues.
Vacant homes are more susceptible to break-ins and vandalism. Even if there is no criminal activity, you can still face other nuisances.
With no tenants, you'll also need to pay utilities and routinely check for problems tenants would typically report.
6. You might lose money
There are many ways you can lose money as a landlord. A tenant might not pay their rent, resulting in lost income and hefty legal fees. A flood or a home fire could add unexpected expenses. Necessary repairs might cost more than the rental income provides.
There's no guarantee of how much money you'll make as a landlord. While you can set the rent and refrain from unnecessary improvements, you could still lose money.
Treat being a landlord like a business and be sure you have the financial plan in order.
Bottom line
Becoming a landlord is a big decision, and you should treat it like starting any other business.
Taking smart steps like learning how to invest in real estate, choosing the right tenants, and understanding local and state laws will help protect your investment.
Remember that laws constantly change, so you’ll need to review them often.
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