Why invest in becoming a landlord?
One of the most recommended ways to invest one's money still is real estate. Sure there are different ways to invest in real estate, but why does it make sense financially to buy property and become a landlord?
Here in my region a flat costs around 2500 / mē while usual rents are at 10 / mē. Say I buy a 60 mē flat for 150,000 and rent it out for 600 / month. All taxes, fees and repairs aside it would take almost 21 years before I start making profits. In reality, however, I would have to pay more than 150k for the flat due to taxes and fees, while at the same time earn less than the 600 due to taxes, costs for necessary repairs, etc.
Compared to investing the same 150k in an ETF portfolio with a conservative 4% in annual returns I would have made around 140k after taxes in the same 21 years i.e. almost doubled the money.
I know that my numbers are a very rough estimate but are they so far off? What am I missing?
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There are at least three important aspectss missing from your equation. However they come with some uncertainty as one typically cannot tell the future performance.
Appreciation of the rental units value. When comparing to the gain of any alternative investment an increasing value of the flat is a gain too.
Increase of rent. Rents are typically adjusted either on a regular basis or at least when changing tennants. Calulation with a flat rent over 20 years is therefore way off.
Tax deductions due to capital expenditures (i.e. mortgages), expenses for the upkeep and maintenance of the property, conserving and management, and so on. Obviously those are depending on your local legislation.
There are multiple other issues to consider of course, e.g. inadvertant vacancy, which would not act in your favour.
with 150K to invest to "become a landlord" you have several options:
Pay for 100% of one property, and you then will make a significant percentage of the monthly rent as profit each month. That profit can be used to invest in other things, or to save to buy additional properties. At the end of the 21 years in your example, you can sell the flat for return of principal minus selling expenses, or even better make a profit because the property went up in value.
Pay 20% down on 5 flats, and then make a much a smaller profit per flat each month due to the mortgage payment for each one. At the end of the 21 years sell the flats. Assuming that a significant portion of the mortgage is paid off each flat will sell for more than the mortgage balance. Thus you will have 5 nice large profits when you sell.
something in between 1 and 5 flats.
Each has different risks and expenses. With 5 rental properties you are more likely to use a management company, which will add to your monthly cost.
Let me add a few thoughts that have not been mentioned so far in the other answers.
Note that for the decision of buying vs. renting a home i.e. for personal use, not for renting out there's a rule of thumb that if the price for buying is more than 20 year's ("cold" / without utilities) rents it is considered rather expensive. I don't know how localized this rule of thumb is, but I know it for Germany which is apparently the OP's country, too.
There are obviously differences between buying a house/flat for yourself and in order to rent it out. As others have said, maintenance is a major factor for house owners - and here a lot depends on how much of that you do yourself (i.e. do you have the possibility to trade working hours for costs - which is closely related to financial risk exposure, e.g. increasing income by cutting costs as you do maintenance work yourself if you loose your day-time job?).
This plays a crucial role for landlords I know (they're all small-scale landlords, and most of them do put in substantial work themselves): I know quite a number of people who rent out flats in the house where they actually live. Some of the houses were built with flats and the owner lives in one of the flats, another rather typical setup is that people built their house in the way that a smaller flat can easily be separated and let once the kids moved out (note also that the legal situation for the landlord is easier in that special case). I also know someone who owns a house several 100 km away from where they live and they say they intentionally ask a rent somewhat below the market price for that (nice) kind of flat so that they have lots of applicants at the same time and tenants don't move out as finding a new tenant is lots of work and costly because of the distance.
My personal conclusion from those points is that as an investment (i.e. not for immediate or future personal use) I'd say that the exact circumstances are very important: if you are (stably) based in a region where the buying-to-rental-price ratio is favorable, you have the necessary time and are able to do maintenance work yourself and there is a chance to buy a suitable house close by then why not. If this is not the case, some other form of investing in real estate may be better.
On the other hand, investing in further real estate close by where you live in your own house means increased lump risk - you miss diversification into regions where the value of real estate may develop very differently.
Relation between being rich and being landlord
There is one important psychological point that may play a role with the observed relation between being rich and being landlord. First of all, remember that the median wealth (without pensions) for Germany is about 51 k, and someone owning a mortgage-free 150 k flat and nothing else is somewhere in the 7th decile of wealth. To put it the other way round: the question whether to invest 150 k into becoming a landlord is of practical relevance only for rich (in terms of wealth) people. Also, asking this question is typically only relevant for people who already own the home they live in as buying for personal use will typically have a better return than buying in order to rent.
But already people who buy for personal use are on average wealthier (or at least on the track to become more wealthy in case of fresh home owners) than people who rent. This is attributed to personal characteristics and the fact that the downpayment of the mortgage enforces saving behaviour (which is typically kept up once the house is paid, and is anyways found to be more pronounced than for non-house-owners). In contrast, many people who decide never to buy a home fall short of their initial savings/investment plans (e.g. putting the 150 k into an ETF for the next 21 years) and in the end spend considerably more money - and this group of people rarely invests into directly becoming a landlord.
Assuming that you can read German, here's a relevant newspaper article and a related press release.
As a landlord for 14 years with 10 properties, I can give a few pointers:
be able and skilled enough to perform the majority of maintenance because this is your biggest expense otherwise. it will shock you how much maintenance rental units require.
don't invest in real estate where the locality/state favors the tenant (e.g., New York City) in disputes. A great state is Florida where you can have someone evicted very quickly.
require a minimum credit score of 620 for all tenants over 21. This seems to be the magic number that keeps most of the nightmare tenants out
makes sure they have a job nearby that pays at least three times their annual rent
every renewal, adjust your tenant's rent to be approximately 5% less than going rates in your area. Use Zillow as a guide. Keeping just below market rates keeps tenants from moving to cheaper options.
do not rent to anyone under 30 and single. Trust me trust me trust me. you can't legally do this officially, but do it while offering another acceptable reason for rejection; there's always something you could say that's legitimate (bad credit, or chose another tenant, etc.)
charge a 5% late fee starting 10 days after the rent is due. 20 days late, file for eviction to let the tenant know you mean business.
Don't sink yourself too much in debt, put enough money down so that you start profitable. I made the mistake of burying myself and I haven't barely been able to breathe for the entire 14 years. It's just now finally coming into profitability.
Don't get adjustable rate or balloon loans under any circumstances. Fixed 30 only. You can pay it down in 20 years and get the same benefits as if you got a fixed 20, but you will want the option of paying less some months so get the 30 and treat it like a 20.
don't even try to find your own tenants. Use a realtor and take the 10% cost hit. They actually save you money because they can show your place to a lot more prospective tenants and it will be rented much sooner. Empty place = empty wallet. Also, block out the part of the realtor's agreement-to-lease where it states they keep getting the 10% every year thereafter. Most realtors will go along with this just to get the first year, but if they don't, find another realtor.
buy all in the same community if you can, then you can use the same vendor list, the same lease agreement, the same realtor, the same documentation, spreadsheets, etc. Much much easier to have everything a clone. They say don't put all your eggs in one basket, but the reality is, running a bunch of properties is a lot of work, and the more similar they are, the more you can duplicate your work for free. That's worth a lot more day-to-day than the remote chance your entire community goes up in flames
The value of getting into the landlord business -- or any other business -- depends on circumstances at the time. How much will it cost you to buy the property? How much can you reasonably expect to collect in rent? How easy or difficult is it to find a tenant? Etc.
I owned a rental property for about ten years and I lost a bundle of money on it. Things people often don't consider when calculating likely rental income are:
There will be times when you have no tenant. Someone moves out and you don't always find a new tenant right away.
Maintenance. There's always something that the tenant expects you to fix. Tenants aren't likely to take as good a care of the property as someone who owned it would. And while a homeowner might fix little things himself, like a broken light switch or doorknob, the tenant expects the landlord to fix such things. If you live nearby and have the time and ability to do minor maintenance, this may be no big deal. If you have to call a professional, this can get very expensive very quickly. Like for example, I once had a tenant complain that the water heater wasn't working. I called a plumber. He found that the knob on the water heater was set to "low". So he turned it up. He charged me, I think it was 0. I can't really complain about the charge. He had to drive to the property, figure out that that was all the problem was, turn the knob, and then verify that that really solved the problem.
Tenants don't always pay the rent on time, or at all. I had several tenants who apparently saw the rent as something optional, to be paid if they had money left over that they couldn't think of anything better to do with.
You may get bad tenants who destroy the place. I had one tenant who did ,000 worth of damage. That include six inches deep of trash all over the house that had to be cleared out, rotting food all over, excrement smeared on walls, holes in the walls, and many things broken. I thought it was disgusting just to have to go in to clean it up, I can't imagine living like that, but whatever. Depending on the laws in your area, it may be very difficult to kick out a bad tenant. In my case, I had to evict two tenants, and it took about three months each time to go through the legal process.
On the slip side, the big advantage to owning real estate is that once you pay it off, you own it and can continue to collect rent. And as most currencies in the world are subject to inflation, the rent you can charge will normally go up while your mortgage payments are constant.
why does it make sense financially to buy property and become a landlord?
Because then your investment generates cash instead of just sitting idle.
All taxes, fees and repairs aside it would take almost 21 years before I start making profits.
No - your profit will be the rents that you collect (minus expenses). You still have an asset that is worth roughly what you paid for it (and might go up in value), so you don't need to recoup the entire cost of the property before making a profit.
Compared to investing the same 150k in an ETF portfolio with conservative 4% in annual returns I would have made around 140k after taxes in the same 21 years i.e. almost doubled the money.
If you charge 600 / month (and never miss a month of rental income), after 21 years you have made 151k in rents plus you still have a property. That property is most likely going to be worth more than you paid for it, so you should have at least 300k in assets.
Having said all that, it does NOT always make sense to invest in rental property. Being a landlord can be a hard job, and there are many risks involved that are different than risks in financial investments.
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