Accidental Landlords: Is Property Worth The ‘Return on Hassle’?
While home ownership remains a dream for most Americans, some lucky souls stumble backward into becoming a landlord.
These so-called “accidental landlords” may have never envisioned collecting rent so soon, yet the bizarre changes in the property market have nudged them into this seemingly lucrative role.
Millions of Americans bought homes in 2020 and 2021, locking in an enviably low mortgage rate of less than 3%. With the Fed's subsequent monetary tightening since 2022 and rates now hovering at around 6-7%, these pandemic-era rates are just too good to give up. So, when life circumstances change, many homeowners opt to rent out their property rather than sell and buy again. The “golden handcuffs” trend can be seen in the steep fall in new home-for-sale listings, which dropped 22% year-over-year in the four weeks ending March 5 this year, per Redfin's chief economist Daryl Fairweather.
These “accidental landlords” may start out with a killer financing advantage, yet that doesn't tell the whole story. For those who are seeking to accumulate assets and avoid liabilities, does becoming a landlord always make sense?
Before embarking on the journey toward the promised land of passive rental income, budding landlords must consider the big picture of what it really takes to manage numerous properties effectively.
Return on Hassle?
Property is a long-term game. It's no secret that running a property requires consistent effort sustained over time. According to Hemlane, a property platform, owners should expect to spend roughly four hours on monthly management work per rental property. This estimate assumes an equal amount of time is spent on leasing, finding a tenant, and turning over the rental, yet depending on circumstances, any of those task categories could balloon unexpectedly.
When it comes to estimating financial costs, another commonly-cited yardstick is the so-called 50% rule. This suggests landlords should expect a property's operating expenses to be roughly 50% of its gross income.
Budding landlords need to clear several hurdles before they can enjoy that cash flow. To the uninitiated, it may look like a great game of Monopoly; running multiple rental properties is no child's play.
“Real estate investing isn't just about the numbers; it's also about the ‘return on hassle,'” says Jorey Bernstein, CEO of Bernstein Investment Consultants. “It's essential to weigh the monetary gains against the time, stress, and unexpected costs that can come with property management.”
Myra Alport, founder of Myra Alport Money Coach, says barely a week goes by without someone telling her they want passive income from investing in real estate, but there is to consider.
“Do you want to answer phone calls during a cold winter night to fix a faulty furnace, or would I rather hire a reputable management company?” she asks. “Can you do the repairs myself, or at least have a team of contractors I can rely on to do the job?”
Alport recommends building up a dedicated emergency fund for your property to cover the inevitable surprise expenses.
After a brief pullback in late 2022, the costs of upkeep for homes are rising again this year.
Nationwide, the average annual maintenance bill for a single-family house rose 9% year-on-year to reach $6,409 in the first quarter, according to Thumbtack's Home Care Price Index. Yet there are still pockets of cost efficiency to be found in other property types. Thumbtack reports fix-up costs for townhouses and condos haven't risen nearly as steeply over the past year, creeping up around four and two percent, respectively.
“The property market isn't a one-size-fits-all investment avenue – it calls for hands-on involvement, financial understanding, and a tolerance for illiquidity,” adds Bernstein. “Knowing your investment style is key to navigating this challenging but potentially rewarding landscape.”
“Do the comps on real estate in the area that interests you,” advises Alport. “Are they in line with the rent you want to charge? What ROI are you looking to achieve? Keep an eye on your cash flow to make sure you're profitable.”
An App for That
Thankfully, there are apps to make managing such administrative tasks easier. Real estate tech (or “proptech”) solutions run the gamut from rental collection tools to property investing crowdfunding platforms.
However, this space is going through a rough patch in 2023. The average pre-money valuation of prop-tech firms this year is just $64 million. According to PitchBook, this is at its lowest it's been since 2013. A continued dry spell in VC funding for these platforms could spell a sharp slowdown in the development of new tools that make life easier for landlords.
“In the real estate world, technology and automation can be powerful allies, mitigating some of the day-to-day hassles,” says Bernstein. However, remember that convenience often comes with a price, which should be factored into your overall investment strategy.”
For those who need more of the human touch, there are always hiring professionals in the real estate industry.
Property managers bring lived hands-on experience in managing properties, which proptech tools obviously lack. They have the interpersonal skills to deftly handle tenant screening and navigate the weeds of lease agreements. They can provide personalized attention to individual properties and call upon their best professional judgment to resolve complications and build trust between owners and tenants.
A well-managed real estate portfolio can be a huge financial asset and the key to unlocking passive income and early retirement for many. However, limiting the friction involved in keeping properties maintained and tenant turnover well managed requires planning and foresight. By leveraging the tools and professionals available and crafting a personalized real estate strategy to their individual needs, landlords can substantially limit the pain of managing property and increase their gains over the long term.
This article was produced and syndicated by Wealth of Geeks.
