3 Things to Know Before You Become a Landlord

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3 Things to Know Before You Become a Landlord

January 7, 2016

By Tarek El Moussa

After the housing crisis back in ’08, the US government put some pretty hefty limitations on homeowners who’d had to short sell their homes or let them go into foreclosure. A lot of these people aren’t eligible to get mortgage loans to buy new homes, so they’re forced to rent for at least a few more years until they’re allowed to try to buy again. As a result, a lot of investors are learning that it’s a great time to make money in real estate rental properties. So, while Christina and I usually focus on flipping, a lot of our students have been asking us how to make money in real estate rentals, and I wanted to share a few things you should keep in mind before you decide to become a landlord.

You’re Not Going to Make Money on Your Own

Okay, that might be a little bit harsh, but it’s about 99% true. If you try to take on a rental property by yourself without a professional property management team, you’re going to be taking on more than just those 3:00 AM calls about plumbing problems or caved-in roofs. You’re also going to be taking on your bookkeeping, property maintenance, and tenant acquisition and retention.

If you don’t have experience and a clear plan for getting great tenants and holding onto them when it’s time to renew, then you’re going to have problems getting people in your house who’ll pay rent regularly and keep the place in decent shape. You’re likely to lose time and money trying to save on property management, so don’t try to go it alone. Get a good property management firm to take care of all that for you.

Paying Back Real Estate Loans Can Be Tricky

When you buy a house to fix and flip, you can usually count on a fast turnaround, so you won’t be too worried about the high interest on a hard money loan or the fee you’ll pay a private lender. You also won’t be too concerned about splitting the profits down the middle with an investing partner when you see all of those profits upfront.

When you buy a house to fix and hold, though, you’re not going to see all of your ROI in a lump sum just a few months after you make your investment. You’re going to see it come back to you over the long term, which is great if you don’t have a high-interest loan looming over your head. Likewise, a lot of investors aren’t going to be that interested in putting their money into rental properties, and you won’t be that excited about splitting your monthly income from the property with your property management company and your investing partner.

You Can Flip Your Rentals Later On

I’m not trying to talk you out of buying rental properties, but I do want you to understand the realities that come with this kind of investment. Along with those realities, there are also a lot of perks, including the option to flip later. If you rehab a property in a down market and it won’t sell, you can always turn it into a rental. Then, later on, you can do whatever repairs and updates need to be made and flip it.

As you’re figuring out how to make money in real estate rentals, do remember that rehabs for rental properties need to be done with tenants in mind. You don’t necessarily need to make all of the same updates you’d make for a flip to make money in rental real estate, but you do need to make sure that your properties are attractive and sturdy. Good luck!

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Tarek El Moussa

Tarek and Christina El Moussa have over a decade of professional real estate experience and have been featured in national print publications, online media outlets, and a popular real estate TV show. Tarek is known for his determination to get the job done and doing it right.