Want to Become a Landlord? Beware the Headaches and Expenses
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Here's your money briefing for Monday, December 19th. I'm J.R. Whalen for The Wall Street Journal. For years, owning property and renting it out was a path to wealth, or at least a way to make some money on the side. But if you're interested in becoming a landlord today, the changing housing market in an unsteady economy is going to mean some extra number crunching.
People tend to overestimate the upside of owning a rental, such as the potential income and tax breaks and just the bragging rights, so to speak. But they underestimate the headaches and the expenses and the calls in the middle of the night.
So what steps should a potential new landlord take to get ahead of those headaches? Our personal finance reporter Veronica Dagger will be here to talk about it after the break.
Thanks for having me, J.R. So Veronica, there have been some big changes in the housing market lately. How have the risks and rewards of becoming a landlord changed?
Well, some people think, you know, just becoming a landlord is like a money-making monopoly game. You know, if you look on TikTok, you'll see, oh, there's so much opportunity for passive income. It's all upside. Well, the reality is people thinking about becoming landlords have a lot more risk and a lot more costs to consider these days. It's harder to turn a profit into After a year of higher home prices and mortgage rates, rents are up. And of course, if you're a renter, you know that very well yourself. But due to inflation, so are the costs of repairs and routine home maintenance for a property you may own.
What is the episode's overview of becoming a landlord in today's market?
Yeah, let's talk more about the costs associated with becoming a landlord. I guess the first cost is just buying the property itself.
Yes. Investor loans are more expensive than your typical 30-year mortgage that you would get on your primary home, for example. So investor loans, you're looking at interest rates in the 10% to 12% range, depending on the type of the loan, the term of it. And that's up from about 7% to 9% earlier this year. When you apply for a mortgage on an investment property, buyers need to put a larger down payment than they would for a primary or vacation home. And they are probably going to face stricter lending standards.
Oh, well, how strict are those requirements?
Well, it includes higher minimum credit scores. So you're looking at at least a 700 credit score, a more desirable debt to income ratio. And then typically, you need to have much higher cash reserves on hand than you would if you wanted to buy just a primary home, a primary mortgage. If you're putting more down and your rate is driving up your monthly mortgage payments, then you're under a lot more pressure to keep that property fully occupied. And some people say, oh, that's not a problem these days. There's so much demand for renters. Yes, but because of these mortgage rates, you may not be able to recoup your costs because you can't necessarily raise your rent to infinity. You have to be able to keep up with the market rates in your neighborhood.
So you can't just charge whatever you want To make a profit, you need to keep up with what's happening in the market so you keep your property occupied.
So you buy the property, but now as the landlord, you're responsible for the maintenance, right?
That's right. So you need to factor in rising repair and maintenance costs. Inflation, supply chain disruptions have all raised the price of raw materials and appliances. Labor shortages have led to higher wages.
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