Are You Landlord-Material?

Written and copyright © of Loreena Yeo 2007

(1) How much money have you set aside for your rental property(ies)?

See, the question is if you have any money ready to be set aside for this business (after all, landlording is a business). I did not quite mean if you have any money set aside. Unfortunately, if you have to dip into credit cards to make the mortgage payment when your tenant cannot pay you, or if you have a plumbing issue, this is a good red flag to say that it may not work out for you. If you can put at least 3 months worth of payments aside (better at 6 months), you at least have a sound financial plan.

(2) Can you cashflow? Or are you going to feed some money into the property each month?

Work out the math. Factor in vacancy rates and estimate repair costs. Not just mortgage payments with property taxes and insurance. There is a real math behind this. What if the numbers do not work? Does it mean this landlording business is out? Not necessarily. Again, it depends on your individual situation. If you need help in figuring this out, contact me. I'd be more than happy to share with you what I know. No pressure and obligation. I feel the more information you have in your hands, the better the decision you make for yourself.

(3) Oppps.......... let me back up. Do you work off a monthly budget and abide by it?

How is your financial situation at home? Are you living from paycheck to paycheck? (Red flag alert)... The truth is that I have heard many people saying that "They are doing okay" or "I got that covered....". What does that really mean? Please let me tell you what it should mean before you really think you have that covered.It means you are on-time with all your personal bills. You are sitting on at least 3-months of cash savings (living expenses) and now that you are getting into the rental business, you should have at least 3-months of additional mortgage payments plus property taxes and insurance. This is the least you must have in order to sit on a strong foundation to begin considering landlording.

Why so stringent you might ask? The more savings you have, the more you can pad away your problems. Then you wont operate in a crisis mode. Having that $500 plumbing problem then because just a mere inconveninece for you.

Should you seek credit cards to fund your emergencies? Absolutely not. The rental business is purely a numbers game. If you have to seek a credit card for help at 18-20% interest rate, dont you think your entire ROI (return on investment) go out the window? Well, how about those 0% credit cards? Well, think again. It already says you are not financially ready for landlording, in my humble opinion.

(4) Do you plan to manage it yourself or hire a property manager?

Either way, property management can be successful if you have the right personality and tools to do it.
The benefits of handling your own rentals is that you save money. Typically, property management fees start around 10%. That means you will also need to factor this fee as part of your cashflow equation. The property manager takes the tenant calls for you, however, you still will need to play a somewhat active role in keeping on top of your property manager. So, instead of dealing with tenants, you deal with your property manager. Late fees are collected for you and typically split between the property manager and you. But we never wish that to happen.

You do not need to listen about Why Rent cannot be paid on time this month. Some real tenant answers are, "I need to buy new clothes for my kids or school items before the kids go back to school" or "It's Christmas and I really dont want my kids to be without this season. After all, 'tis the season to love and give, right?"........ Going back to school in August and Christmas occuring every December suddenly catch them by surprise. Be prepared that people make decisions with their money and it is beyond your control. I am not here to judge if it is right or wrong. It happens. (I do not say that ALL tenants are this way. But you need to assume the worst to make your most conservative decision).

The advice I provided may sound difficult or somewhat harsh, but as a realtor and a trusted advisor in your new endevours, I'd rather be upfront with you than to get you scrambling when you are already in the situation. Call me if you have considerations in becoming a landlord - whether it is here in the area or anywhere else. I'd love to share with you.

PS: I am a landlord and I have some experience in this field. I am not here to say whether this is for you because ultimately you do what you think is best for you. But you should hear all the goods and bads before you get your feet wet. After that, you will still have your own lessons to learn.

Related Article:
Is Landlording A Better Alternative to Selling in this market?