I wrote all about how I bought my first condo in September. Since that time, I have had a roommate living with me paying rent each month. After doing a little analysis, I found that I could easily rent out the entire condo for a big profit. It got me thinking about becoming a landlord on a larger scale.
I started my journey to being a landlord just like most people start with homeownership. I found a home I could afford that met all of my needs and expectations. Part of that was having a second bedroom.
While I plan to use the second bedroom as an office and storage space once I am living with a girlfriend/wife, I don’t need all of that space today. For now, it is a great bedroom for one of my close friends.
Because he is a friend and I want to live with him, he gets a good deal on rent and I get about half of my monthly mortgage and HOA fees paid each month. All in, it costs less per month than my old apartment that was half the size.
One incredibly important part of the situation is being able to afford it all on your own. I did the math to make sure I could afford the condo alone. With a roommate, it is easy. Without, I would still be okay.
Just because I have extra cash each month doesn’t mean I spend it. Quite the opposite actually. I live like I am paying the full amount, I just take the extra and either make extra mortgage payments, save, or invest.
The extra payments save me a lot of interest in the long run, and the savings and investments are all going to my next place. I could even buy another condo in my building, move there (with a primary residence mortgage), and rent out my current unit for profit.
Of course, to do this I need to have a 20% down payment saved up for my next place plus enough savings to float both home while I get the old one rented out. Rentals in my neighborhood go quick, often within a week, so saving up a couple of months expenses should be plenty.
It’s All About Cash Flow
The key to real estate success lies in the cash flow. If you are going to sink a lot of money in to own the property, it needs to pay a stable return that covers the monthly expense plus a comfortable profit. Remember, as a landlord you are responsible for repairs to the property. Take that into account when calculating the rent.
I put a very large down payment on my condo. My monthly mortgage, insurance, taxes, and HOA costs are about $1,000 per month. For a 2 bedroom, 1,200 square foot condo with a pool and a gym in Capital Hill, I could easily get $1,500-$2,000 per month. After putting money away for repairs, I would be making a profit around $500-$700 per month.
Scale It Up
That is just the beginning. If you are smart with your rental profits and continue to save, you can buy another property. And another. Keep going.
Eventually you can find economies of scale in the repairs and expenses. You can build up a nice portfolio of properties. You earn enough to cover the vacant periods and turnover. You slowly start to pay off the loans, and your profits increase dramatically.
You go from $500 a month to $1,000. That grows to $2,000. There is no limit from there. You can make as much as you can afford to invest. If your real estate investment business grows enough, you can make a full-time living from it. If it grows enough from there, you can earn a full-time living while hiring a property manager to take care of everything for you.
The sky is the limit.
That dream sounds pretty great; but remember, it is not always easy. You have to put in a lot of time and effort to find the right properties. You are risking a lot on the value of the property and the quality of your renters.
Some renters cause a lot of damage. Others don’t pay. Sometimes there are vacancies. You may need to hire a lawyer to deal with problem tenants and evictions. Property prices rise and fall. Neighborhoods become trendy while others become less desirable. Banks give lots of loans one day and tighten things up the next.
It is not a perfect business model. However, it offers a lot of opportunity and freedom. With great risk comes the opportunity for great rewards.
Are You A Landlord? Do You Know One?
If you have any knowledge or experience in property ownership and management, I would love to read about your experiences, successes, and lessons learned in the comments. Please share your story and let us know what we can do to become a successful landlord.
8 thoughts on “Steps to Become a Landlord”
I was a landlord, but I never rented out a room or had a roommate! I have written a few articles on the subject, Landlord Nightmares, Are You Ready to Be a Landlord, and How to avoid Problem Tenants. Now is a good time to become a landlord because the numbers make sense.
Thanks for sharing those posts. I will have to take a look.
Just be careful owning multiple properties. If you own them outright it is less of a problem but if you have mortgages on all of them a string of vacancies can send you into bankruptcy…
Great point Lance. I think the key, like other types of investing, is diversity. If you own a handful of properties, you can handle a vacancy or two. If they all go vacant, though, you can get stuck in a tough spot.
Have you looked into owner financing? You might get a lower interest rate with fewer loan expenses and lower down payments.
I have not looked into that option before, though it could be great in situations where the owner isn’t looking to cash out quickly.
You’ll only need the 20% on your next place if you want to rent it out. If you keep your current place, and move to the new place… you’ll only need 5%. We did the same as you. In 2003 we purchased a condo, but we were students, so we lived in the basement and rented out the bedrooms to other students. In 2009 we purchased a new house – and rented the condo out to a family. Our new house has an inlaw suite in the basement. We live on the upper 2 floors, and rent out the suite to two students. It’s been great!
That sounds awesome Julie. You created a cash flow machine! I like putting down a higher down payment if possible to make sure I have the lowest monthly payment possible. It is worth it to me to invest more up front to have better cash flow in the long run.
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