Do you have the financial sense to be a landlord?

January 9, 2018

In July of 2017 we posed the question – would you make a good landlord? We talked about the practical demands placed on a typical landlord to help you assess your suitability. Today we’re going to concentrate on the financial side of the equation, delving into the monetary pros and cons of owning a rental property.

 

Higher leverage than other asset classes

Perhaps the most obvious financial positive to becoming a landlord is the lower investment required when compared to other asset classes. If a $100,000 deposit is used to purchase a $500,000 property, the investor stands to benefit from the gains of the entire $500,000 investment, not just the $100,000 deposit. This is called leverage. If prices rise by five per cent, the $100,000 deposit becomes equity of $125,000 (five per cent of $500,000) rather than the $105,000 it would become if there was no leverage.

 

Your tenant pays the mortgage

The amount you borrow from the bank and the duration of your loan will determine how much the monthly mortgage payments are. If you get some advice from those in-the-know and calculate this correctly, the rent your tenant pays will cover most or all of the required mortgage payment amount.

 

An investment in your future

Unlike term deposits and many other types of investment, a rental property and accompanying mortgage are a long-term investment. This means you can’t recklessly cash it in with the click of a mouse or a quick phone-call. Be it in aid of your retirement fund or an inheritance for your offspring, the circa 30-year commitment you make when you take on a rental property mortgage can bear lifechanging fruit that’s worth the wait.

 

Take a breath and consider the risks – will you have to feed it?

This all sounds excellent, but there are risks with any investment, and unfortunately as a landlord these are often out of your control.

If you haven’t been as patient and smart as the theoretical landlord detailed above, who asked for advice, your rental property may turn into a money pit. If you didn’t do your borrowing sums correctly you may have to top-up the mortgage payments because the rent doesn’t cover them.

 

Tenants are a calculated risk

You or your property management company will do everything you can to place trustworthy tenants in your rental, but you still depend on the tenant’s ability to pay their rent. Unfortunately, nothing will safeguard you from having your tenant lose this ability. In this situation, which may be out of their control, you will have to cover the mortgage payments in full while you chase arrears or find new tenants.

 

Property maintenance, eviction costs and a big bucket of money

Hopefully you’re starting to gather there is a lot to consider about the landlord life – most of which costs money! Ongoing maintenance like painting, re-carpeting and deep cleaning are essential costs that need to be accounted for in your planning and budgeting.

Then there are the not so obvious costs like emergency repairs (which can often incur pricey out-of-hours charges from tradesmen) and the cost of evicting tenants if you should be unlucky enough to pick a bad apple.

To cover all these costs, you’re going to need to build up a financial reserve, aka: a big bucket of money. This is perhaps the most important, yet overlooked financial requirement of a landlord.

 

Seek wise counsel to help you swim, not sink

If you’re considering a leap into the enticing landlord waters, do yourself a favour and seek wise counsel from professionals like the team at First Avenue Property. Having guided countless first-time landlords through the set-up process and beyond, they are able to help you navigate all the above and much more. Touch base with First Avenue Property, today.

 

Images: money by Thomas’s Pics under CC BY 2.0

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Filed under Information for home buyers \ Landlord Information

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