You don't hear the phrase "I want to be a landlord when I grow up" very often. Yet all manner of people find their way into landlording, often via an indirect route. Maybe they've invested in real estate, inherited a property, or moved from their own home but decided to rent it out because it's hard to sell.
If you're thinking of becoming a landlord for the first time, there's much more to consider than how much rent you can charge. Let's look at some of the pluses and minuses to owning and managing rental property.
Great Things About Being a Landlord
Owning rental property offers these financial and lifestyle benefits:
- Appreciation and wealth building. If you hold onto your property long enough, it will almost certainly go up ("appreciate") in value -- eventually. Since World War II, real estate prices in America have risen an average of 5% a year (with some nerve-wracking ups and downs in between). It's a great way to increase your net worth.
- Income . A well-managed investment property, with tenants who pay the rent on time and monthly expenses that are less than the rent, can bring you a steady stream of income.
- Diversification of income . If you're laid off from your job, or your health takes a turn for the worse, your primary source of income -- presumably your salary -- could be jeopardized. Owning an investment property diversifies your income stream, and can give you a cushion.
- Low-risk investment. Unlike more volatile investments, the returns on real estate are fairly steady. While stock values can fall or even disintegrate entirely, land and property won't disappear on you.
- Investment diversification. Owning property also diversifies your investment portfolio, a cardinal rule of investing. As you approach retirement, it's good to start shifting into lower-risk investments, to ensure that the cash you need doesn't disappear when you're relying on it.
- Leverage. Unlike other investments, a little bit of cash will buy a lot of real estate: A down payment of 20% of the value of the property is usually enough to get you started. Leveraging your investment allows you to trade up to more profitable properties.
- Short-term tax advantages. While the rental income from your property is taxable, you can also deduct most of the expenses related to owning and maintaining the property. Among these are mortgage interest, insurance, repairs, and upkeep. They also include your business expenses, such as phone calls, office supplies, accountant and lawyer fees, and more. Another major tax-advantage is the ability to "depreciate" your property -- to take an annual deduction that reflects the decreased value of the property caused by wear and tear. For more information, see Every Landlord's Tax Deduction Guide, by Stephen Fishman (Nolo).
- Long-term tax advantages. Even if your property skyrockets in value on paper, the IRS won't expect you to pay taxes on that increase until you sell. (Your state and local property taxes may be another matter, rising steadily to catch up with the property's value.) And when you do sell, there are various strategies you can use to decrease your tax liability.
- Part-time commitment. If you own just one property, and it's not too far from where you live, you can probably handle its management in your spare time, while still working a full-time job. A little job flexibility will help, of course, to deal with tasks like getting the place painted while dealing with the departure of the old tenant and interviewing prospective new tenants. Your time commitment will be even less if you hire a property management company -- though your profits will decrease as well.
- Professional development. Being a landlord and owning property can give you a sense of accomplishment (and some stories to tell at parties). It shows that you've broken out of the mold of the average working stiff, and are willing to take risks and accept major responsibilities. You're learning new skills involving finances, dealing with people, and maybe even home repair, which may help you in other areas of life.
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