Yesterday, I received an email from my tenant, asking if she could buy a new vacuum cleaner. This is the third one that would be bought for that property, in four years. I don’t know how long your vacuums last at home, but I think my mum has had the same one for over 10 years. Sure, there are four people living in the property and any item will get heavier wear and tear than if I just rented to a single person, but replacing something when you don’t even live on the same continent is a bit of a pain. And I was informed that the bath tub had some mold, a window didn’t close properly, and a few other news a landlord always dreads to listen. So to put things into perspective, here is a list of good and not so good things about rental properties.
Money!! That is why you are in in the first place, so yes, it is really nice to see the money come into your account every month. Especially if you managed to get a good rental yield, and if your tenants, like mine, pay by wire transfer, you know the money will come, and it will cover the bills and then some.
Almost passive investment. Owning a rental is almost a passive investment. You can make it fully passive by hiring a property manager for a small fee. Except in my town that fee was above 20%, and when you take off the taxes on top, well, that’s a lot. So far I have managed to oversee everything from abroad, mainly thanks to perfect tenants.
Building equity. Not only are you receiving a little bit of money every month, you are also paying off a mortgage, or more exactly, your tenants are paying for it. In 20 years, you will be the owner of a property someone else paid for. I guess even your parents didn’t give you such a nice gift.
Wear and tear. So far this year we have had a broken heater, a broken washing machine that was first fixed then replaced, a broken vacuum and a few minor items. Total was over $1,000, which is a good chunk of profit, although it is tax deductible. You should account for wear and tear when you crunch your numbers before buying a rental.
Not so passive investment. Being a landlord is mostly passive, until it is not. What I dread most are vacancies. I need to put ads online, pre-screen potential tenants, then ask the current ones to meet with them for interviews and let me know the one they liked best, as they will be roommates, I have learned from being one myself at some point that it is better to put in someone the others will get along with or you are bound for disasters. When something breaks, you have to go on site, or pay an arm and a leg for someone to do it for you (my solutions, when tenants can’t DIY), eating up your rental profits.
Taxes. Although you can offset part of the wear and tear, and depending on where you live, the interests of your loan from the mortgage, rental income is usually taxed pretty high. Get together with an advisor to see if it is more profitable to operate your rentals under a limited company or any other setup that will help you lower your tax burden.
Catastrophes. It happened to me as a tenant, my place got flooded, the roof started leaking all over my stuff and there was so much water the neighbor below also got flooded. It was a national disaster and insurance companies were overwhelmed, so my landlord didn’t get back much, just enough to fix the roof, but was still out of pocket to replace the carpet and paint the walls. Double, triple check how well insured you are, because when something happens, it can cost you thousands.
Bad tenants. They are the worst part of it all. When my tenant died in Paris, he had been paying his rent on and off for 9 years, but I always had landlord insurance like CIA insurance, and they paid in his place then dealt with him to get the money. When his widow stopped paying for 18 months and her eviction took that long, they paid too. They covered a cleaning of the place and took out all the trash they had hoarded for 10+ years. But the place was still a mess, in dire need of repairs after 10 years of bad treatments. I may moan about my UK tenants being needy but at least they help me keep the place in good shape, whereas the other ones didn’t let me in or make contact for years. Bad tenants are more than people who do not pay. Imagine they set your property on fire, or break all windows just because they fancy! It will take more than their deposit to cover your losses.