Should I become a Part-Time Landlord? Part 2

This is Part 2 of Should I Become a Landlord.  Part 1 is about considerations that are not financial. Are you cut out for it psychologically? Part 2 covers some financial considerations.

First, let me be clear.  I'm not an expert at being a landlord and investing in property. I have done it. One time with a residence. Several times with commercial property. I'd say overall that my results have been mixed, but leaning toward the positive.

These financial considerations are in no particular order, but hopefully, they will help you think.

1.  Becoming a landlord is oftentimes a highly leveraged investment. It means you are borrowing a lot of money to acquire the asset that you are going to rent out.  People view this as normal with real estate, but from a strict investment point of view, it really increases your risk. Small fluctuations in the market price for property can put you under water quickly. Remember, the amount you owe doesn't change with the market price (which can be good or bad). This kind of leads into #2.

2.  Plan for financial success and failure. Too often I hear people say “I can get X in rent and my payment is Y, so I’m good.” What I don’t hear people say is “I’m not getting any rent right now, and my payment is Y. It’s not easy, but I’m still good.”  You need to be able to say both things. If you can’t, you are taking too much risk.

3.  Evaluate the investment as if you owned the whole property free and clear. This exercise separates the investment return of the property vs the cost of the borrowed money. There is nothing magic in doing this. It just helps you think it through in an organized fashion.  

4.  Remember that your total cost is not just financial. There is also some work and time involved.

5.  If you borrowed money to pay for the property, you shouldn't view this investment as an income producer. By "income", I mean money you can take out every month to live on. (this is also called "flowing cash") Most of that money is probably going toward paying off your loan. You can view it as a wealth builder if you are paying down your note every month. Is isn't money you see, but your net worth is increasing with each payment of the note.

6.  There are two ways the property builds your wealth. The first is the rental income that either pays you or pays toward the loan. The second is the appreciation of the property over time. Both of these usually happen, but neither is guaranteed, and you will probably have periods where neither are happening.  

7.  In general, the longer you own the property, the better the investment becomes.  Usually the property has appreciated and the loan is getting paid off more rapidly.  You still may not flow much cash, but you are building wealth.

8.  Remember, a real estate agent has a vested interest in you buying a property.  Most agents are good, honest people, but they do have conflicted interests. Just keep that in mind.

I can help you with this kind of opportunity if you'd like to discuss it in detail. You may want more feedback than just me, but I think I have enough experience to provide you one solid, unbiased opinion.