My friend over at The Dollar Disciple recently posted a 2-part series of articles on the reasons why he loves real estate. I agree with all of his points, but I think its also important to balance the positive attributes of real estate with some of the negative experiences that I’ve dealt with. In a previous post, I highlighted some practical tips to consider for someone who is looking to purchase rental real estate. This post will highlight some of the negative experiences.
- If your MAGI is greater than $150,0o0, you can’t deduct rental losses: Being a 1 percenter, I experienced this first hand. I bought my first and second rentals when I earned significantly less income. The IRS states that, if you actively participate in a rental activity you can deduct up to $25,000 of the rental loss. To actively participate means that you own at least 10% of the property and you make major management decisions, such as approving new tenants, setting rental terms, approving improvements, and so forth. (No, you don’t have to mow the lawn or answer middle-of-the-night phone calls from tenants about a backed-up toilet.) But this exception phases out as your income rises. If you have modified adjusted gross income over $100,000, the loss you can deduct decreases by $0.50 for every dollar over $100,000. The maximum loss is completely phased out when your modified adjusted gross income reaches $150,000.
- If you are not using a property manager, you are always on call: Most of us have enough to worry about with our primary homes, let alone a second or third property. You can forget about turning your cell phone off, or feeling 100% at ease on vacation. If your tenant calls with an issue or emergency, you are obligated to resolve it.
- Evictions: In this day and age, even people with good credit will lose jobs and subsequently, unable to pay rent. I dealt with this firsthand. The hardest part is going to the apartment the day of the eviction with a police officer and a locksmith. One of the hardest things I had to do.
- Loss of personal security & privacy: Even though I use a PO Box and a Google Voice phone number, if someone wants to find you, they can. Though it doesn’t happen often, if you evict someone, you are their enemy from their perspective. If they want to harm you or your family, they can find you.
- Repairs: Though landlords budget for expenses and repairs, no one can anticipate a major repair. A water heater bursting, furnace needed repairs, a new roof, toilet leaking are all repairs that have to be addressed. These types of repairs can be quite expensive.
- Knowledge of local and federal laws: There are more laws and regulations being created every day – and a huge volume of them are associated with the private rented sector. Landlords not only need to be aware of the Housing Acts, the Landlord and Tenant Acts and the Rent Acts; they must also be familiar with and observe all the frequently changing regulations for health and safety, gas safety, fire safety, landlord licensing and local authority enforced minimum standards.
- Vacancy: Sooner or later your tenant will leave. Whether you hire a realtor, or do it yourself, everyday that the property is vacant is another day that YOU have to pay for a second mortgage. We are lucky enough to be in the 1% of income earners in America and living below our means so we could absorb it, but it may be difficult for most Americans.
So there you have it…the downside of being a landlord. I still think there is value in it, but its a personal decision and depends on your risk tolerance. Everyone will take the pros and the cons and come up with a different benefit/risk ratio. For me, I would have to take drastic measures to mitigate the risks I listed before I pursue another rental property.
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