Just say the phrase "rental property" and people's eyes light up. Everyone knows that rentals have the potential to generate income above and beyond the cost of carrying the property.
And some folks do turn a nice profit from rentals.
But the devil himself is in the details—as I discovered when we decided to rent out a house we owned in 2008. Little did we know that the rent would barely cover our costs, the upkeep would cost thousands, and we'd end up trying to sell it for zero gain. Here's what I wish someone had told me:
- Wear a flak jacket. Dealing with leases, tenants and repairs is not for wimps. Build up the muscle for hard-nosed negotiations and legal battles before you start. Brace yourself to see the worst side of human nature: raw greed, deception, blinding rage. Everything may go smoothly. Or not. Be prepared.
- Know the rules. Tenants' rights are strong. Retain a savvy local lawyer to help you draw up leases and contracts. Tap into landlord-friendly resources to help you sort out complex issues. A strong defense is your best offense.
- Run the numbers. Many people get fixated on the idea of profit—forgetting that no one is paying for a new garage door but you. Also, loan terms and insurance rates are typically higher for rentals. Yes, you can deduct many rental costs (mortgage interest, property taxes, repairs)—and you may be able to write off some losses. But the out-of-pocket costs can eat into your earnings. Do the math, factor in the drain on your time—then decide if being a landlord is the path to wealth for you. I wish I had.