Deciding If We Should Become Landlords: Part 3, The Final Decision

The Cons:

In our previous post “Deciding If We Should Become Landlords: Part 2”  we took a look at the potential benefits of becoming landlords. We touched briefly upon the freedoms we may gain both financially and personally, and spent a little time imagining our future possibilities.

However, upon further examination we are still not convinced that becoming landlords would be the right move for us. We have family and friends who have become landlords, and some of their stories are downright scary. We have heard many nightmares from non-paying tenants that refuse to leave, to other outright weird and crazy scenarios.

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I say terrified! Much like the look on this boys face. Why do we even have this thing? Mr. FE collects some real oddities!

I’m not so sure that Mr. FE and I could handle having our property destroyed or one day walking in on a snake breeder (true story). In fact, I’m terrified to be around any living creature that has either no legs or more than four. Terrified, I tell you!

But before we allow our imaginations run on a wild escapade, we must first take a look at the numbers. Below is a simple spreadsheet I created to get a general idea of where we may land if we were to turn our property into a rental.

Estimated Monthly Profit
Rent $3,000 We used the average of both estimates from our realtor stated in the previous post
Mortgage/HOA dues -$1,559 We created a separate line item for our property taxes for purposes of discussion
Property Tax -$354 Property taxes in New England are insanely high!
Insurance -$53 This is a rough estimate from our insurance agent
Management Fee -$300 We used the average for our area which is 10% of the monthly rent
Vacancy -$300 We used the average of 10% of the monthly rent
Repairs -$150 We used the average of 5% of the monthly rent
Estimated total profit $284 Net profit

Unfortunately, $284 is a very small profit. Worse, this is the estimate before taxes so we more than likely stand to make even less. Then after we add in our imagined scenarios like having a tenant spray paint our walls and floors with orange stick figures, our number looks downright horrible.

So after much deliberation, Mr. FE and I have decided that becoming landlords would not be the right move for us at this time. We believe our energy is better spent looking for another alternative to increase our passive income. However, we are willing to reconsider this option after our mortgage is paid off or if the real estate picture changes.

For us, becoming landlords doesn’t fit our current desired lifestyle. We treasure our quiet times and avoid drama. We enjoy taking off on a weekend with little notice to seek out the natural beauty of the mountains and pristine lakes that surround us. Thus, becoming landlords no longer appears desirable to us. However, we will continue to seek out ways to increase our passive income in order to secure our financial future.

Do you believe we arrived at the right decision? What are your thoughts on becoming a landlord?

 

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24 thoughts on “Deciding If We Should Become Landlords: Part 3, The Final Decision

  1. Its so great that you are doing an analysis before jumping in. A lot of people don’t do that and rather jump in with both feet after hearing a few great stories. At least you have a reasoning for your decision that you can back with numbers. My husband and I are currently reluctant to be landlords as well, so as a middle ground instead we invest in CREIT (Canadian Real Estate Investment Trust) stocks that own commercial real estate all over Canada and lease out to companies. They pay dividend quarterly which we choose to reinvest back to buy more CREIT stocks until we get older and our portfolio grows at which point we will receive the dividend as cheque in the mail every 3 months. I am not suggesting you do that, it just works for us.

    Liked by 1 person

    1. We believe it’s important to look at both sides of the coin and weigh out our options carefully. That way we feel much more comfortable in our decision.

      We have looked into REIT’s, but haven’t made the jump yet where my parents lost a substantial amount of money from their REIT after the real estate market went belly up in 2008. We know that all investments carry a level of risk, but in their case, the money was lost for good. With a solid index fund, we believe that you have a better chance of your investment making a recovery. That’s not to say that their are no worthy REIT’s. I’m sure there are, but we just need to do some research before we feel comfortable with forking over our hard earned cash. I suppose that should be another blog post! – Mrs. FE

      Liked by 1 person

    1. We’ve had this suggested to us many times and it does seem like a good idea. Friends of ours are trying this out as we speak, so I guess we’ll keep watch and see how it goes for them. Thank you for the suggestion! – Mrs. FE

      Liked by 1 person

  2. I’ve thought some about possibly renting out my own house in the future, after I’ve paid off my mortgage AND saved up enough for another deposit … I wouldn’t have the HOA fees and property taxes in Philadelphia are CHEAAAAPPPP so it would mainly be the question of whether to have a management company handle it, and any repairs that would need to be handled.

    But ugh I hate confrontation, and I’ve had close friends have nightmare people squat in their properties … maybe I’ll have to think of a different source of “passive” income. And your snake breeder comment just turned me right off to the landlord idea!

    Liked by 1 person

    1. It sounds like renting would be a much better option for you than us. You can’t beat a combination of no HOA fees and cheap property taxes. Definitely something for you to think about down the road.
      We hear you on the confrontation thing. This is one of the many reasons why we decided that we weren’t ready to be landlords. We like our peace and quiet! 🙂

      Liked by 1 person

  3. Not trying to sway you or convince you but to give you an alternate viewpoint…. You already have a mortgage, why not let them pay for it so you can live cheaper somewhere else. Also, every month you build equity by paying it off. Being a landlord is not for everyone. Whatever you decide to do, it is good that you are taking the time and not rushing into it as it is a big decision. Good luck on your decision.

    Liked by 1 person

    1. We have considered that option, but in New England the cost of living doesn’t get any cheaper. Now if Mr. FE gets offered a transfer to another location, we would try turning it into a rental. I guess we’ll have to wait and see what the future brings us!

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  4. You would be correct in the $284 estimated profit. Rental properties that carry mortgages generally profit $200-$400 after all true expenses. Most people ignore the costs of repairs. If your roof needs to be repaired, it takes 4 years to breakeven with the cost of that expense. My financial plan is cash paid in full property management. I don’t want to take on risk that impacts my home. I’m don’t understand why people jump into this field carry two mortgages, risk is totally ignored. If I were you I would wait. A great book on the subject is “Hold” HOLD: How to Find, Buy, and Rent Houses for Wealth https://www.amazon.com/dp/0071797041/ref=cm_sw_r_cp_awd_7XEkxb0FJ8JFZ

    Liked by 1 person

    1. We agree that it is a huge risk turning our home into a rental at this point. We don’t stand to make any money off of this and we would do far better at finding other avenues for passive income. This could become an option once our mortgage is paid off and we may revisit this again later.

      Thanks for the book recommendation! I’ll will definitely check it out!

      Liked by 1 person

  5. Wow, with those numbers I definitely think you made the right decision for now in waiting to become landlords. If you are looking for another alternative, you just might enjoy the article I am getting ready to post. Let me know what you think!

    Liked by 1 person

    1. We agree! New England in general has a high cost of living and our expenses are typically higher than most of the nation. Despite the high COL, we still love it and wouldn’t even consider moving!

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  6. I worked for a landlord before, and that made me want to never even own property at all. I have recently come around to wanting to buy a condo in a big building whose roof I’m not in charge of at 3 am. Depending on your jurisdiction, tenants’ rights are just too strong to merit the hassle. My least favorite call while working for the landlord was tenant one complaining that tenant nine stole 50 cents in the laundry room and tenant one knows it was tenant nine, because she watched her.

    Think of the most petty drama you’ve seen in your life and multiply it.

    Liked by 1 person

  7. Hey, sounds like your decision is set. Plus, as a mainly stock investor, I don’t think property is the best investment class. So bear that in mind with what I’m about to say:

    I think you’re missing the other side to property investing – the capital appreciation. Over the long run, that also hugely adds to the return, but isn’t factored in.

    However, with how much you don’t like the idea of it – sounds like you made the right decision. If you want to be investing in property some way, I’d say REITs are definitely the way to go. The net (cash) income return you’d get would be far more than the scenario you outlined. Obviously there is risk, it just depends on what you buy, and when. If someone bought a property in an overpriced area in 2007, they too may still be sitting on a loss.

    Anyway, stocks & businesses for the win.

    Tristan

    Liked by 2 people

    1. Although I didn’t write about, we did work out some preliminary numbers regarding the capital appreciation, but in the end we just weren’t ready to become landlords.

      We have heard of REIT’s, but to be perfectly honest we don’t know a lot about them. My parents were heavily invested in REIT’s and lost their money when the Great Recession hit in 2008. They were unable to recoup their loss because the REIT’s they were invested in went belly up. For this reason, we are a little intimidated by them. However, we will do some research on REIT’s to make sure we are not missing out on a wealth building opportunity. We also understand that like stocks, it’s all in what you pick.

      We appreciate the suggestion Tristan!

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  8. Great analysis!

    My experience has been good from the aspect of tenant quality. Over 10+ years in up to 4 rentals I have never had a “major” tenant problem. However, our only significant financial returns have come with market appreciation. We have always been phased out of passive losses so the rentals were never a write off to our personal income only to the rental expenses. Once the properties were paid off I just looked at the asset value compared to the cash flow it was generating and I could not justify the return verses the risk and effort. We are on our way out of the rental business. When we sold/sell we take the accumulated passive loss write off for each property against any gains and then against personal income, which makes selling even more appealing.

    When I was single I would live in a house, move out of it and turn it into a rental without a second thought. Now, after living in a house with the wife and kids and making renovations I would have a hard time turning it into a rental. Our attachment is strong and my worry about a tenant damaging something would be high.

    If we have rentals in the future it would have to be because the cash flow was excellent, the property had high appeal, we anticipate good appreciation, and the hassle factor appeared to be low.

    Liked by 1 person

    1. Wow! It’s sounds as though you got very lucky with your tenants, especially where you’ve been doing this for a while. The return on your rentals isn’t surprising since we keep hearing very similar stories from others who have experienced the same.

      We couldn’t agree more with you that a house becomes a home once you build a life around it, and we can certainly understand why you wouldn’t want your home destroyed. Like you, it’s worth far more to us to preserve the home and the life we built here and to protect it from being destroyed.

      Thank you so much for sharing your personal experience with us! – Mrs FE

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