So You Think You Want to be a Landlord?

With the state the economy is in and the uncertain nature of most forms of investment, real estate is probably looking like a pretty safe bet to you right about now. I certainly agree with that assessment. There is nothing like a tangible product in which to invest. It gets a little spooky when you realize that all of your money is tied up in someone else’s promise to give it back with interest. Recent events on Wall Street and the likes of Bernie Madoff made us begin to consider the risks of that sort of blind faith. And today, although things seem to have stabilized a bit, I don’t think any of us can forget what we’ve learned.

So, what about real estate? We have talked about this possibility several times in this article over the years. There isn’t any doubt in my mind that there simply isn’t anything that returns your money in so many ways as property. There is, of course, the direct return on your investment—income produced against dollars invested. Then again, there are the tax benefits, deductibility of expenses, taxes, interest and depreciation, all of which minimize your tax liability. But then there is the subtle benefit of appreciation; although we don’t experience the wild swings in value that effect other parts of the country, we do have a fairly gradual yet steady improvement in value year over year.

Some years are better than others and some years are just flat, but the overall trend is up.
In any event, whether a good investment or not, it is not my purpose here to convince you either way, but to enlighten you regarding the life of a landlord. The fact is, there is probably nothing as aggravating as being responsible for someone else’s home and some tenants can be downright impossible. However, if you have determined that this is the correct course for you, a little advanced planning couldn’t hurt.

Perhaps your first decision—and the one that will lead to the greatest bliss—is the development of your investment philosophy and the choice of the type and location of your investment property. You must first determine your investment goals. Are they designed for the short term, maximizing your immediate return, or are your goals long-term, with the intent of maximizing the ultimate value of the investment? Both are legitimate desires, but the goals you select will determine the path you take. If your goal is short-term, you will re-invest very little and take out as much income as possible; if, on the other hand, your goals are long-term, you will be reinvesting most if not all of the income in order to improve the property, resulting in increased future value.

Your next concern is the type and location of the property. You’ll have to decide if you will be best served by acquiring industrial, commercial or residential property, and then shop in a location that best meets your needs. These decisions are most often determined by your demeanor and the amount of capital you have on hand. Each property type has numerous benefits. Industrial and commercial property are generally more expensive to acquire than residential property, but the advantage is that tenant relations are usually kept on a business level. Residential property is often less expensive to obtain, but you are dealing with your tenant’s home, so the relationship is often tense, particularly in times of high stress. If the toilet isn’t working, your residential tenant will expect that you have your plumber on speed dial.

Concerning the placement of tenants in your building, the three most important elements are selection, selection and selection. Establish a set of criteria and adhere to them; do not waiver and do not bend your rules. I understand that when you have a vacancy, your primary urge is to get it filled; however, I have become convinced over the years that the phrase, ‘patience is a virtue,’ was coined for this very situation. Happy landlord/tenant relations result from choosing carefully; making concessions over credit qualifications or tenant compatibility may score you an immediate tenant, but the long-term headaches may be unbearable.

In my opinion, landlord/tenant law in Pennsylvania is very heavily skewed in the tenant’s favor—really, to an absurd degree. Tenants who fail to pay their rent without any justification at all can tie you up for months, waiting for either collection or eviction. My best advice to you is to hire a property manager to handle all of the ugly details. There are people who love to do it, though I’m not sure why—it is a difficult, thankless business. I was a property manager for 16 years and you will notice its effect on my hairline.

Whatever you decide, you are on the right track. Real estate is a wise, safe and lucrative investment, as well as a great retirement plan!

Gary Straub is an independent real estate consultant who has been a real estate professional for 36 years.