There are tons of lists of potential passive income sources online that include renting out a home. In theory, this makes sense, as you are making money simply by letting someone live on your property. However, it can lead to a serious misunderstanding of what it means to be a landlord.
The reality is that being a landlord is tough. Yes, it can be incredibly lucrative and does not require you to quit your dayjob. But it is still a job that takes significant time and energy, as well as investment beyond the mortgage you’re paying on the property.
Many landlords compare the experience to running a small business. Here are 5 reasons why.
1. Financial Admin
The first thing many new landlords realize is that they cannot simply continue treating their property as their own home. Rather, there is financial admin to be done that more closely resembles that of a small business.
You need insurance, for a start, but you cannot use homeowners insurance. Rather, you need to get property insurance for landlords. This insurance covers anything that happens to your home while it is inhabited by a tenant, and requires you to take on landlord responsibilities.
You will also need to pay taxes specific to landlords and investors making money from real estate. If you have only ever paid employer income tax and other individual taxes, you’ll need to get better acquainted with what it is like to run a business.
2. You're The Decision-Maker
If you have experience running a small business, you will know the particular stress of being the ultimate decision-maker. You may have employees who you have given the power to make certain decisions, but the most important things all come through you. If you make a poor decision, you have no one to blame but yourself.
In addition to the stress of making decisions for your own business, you need to deal with any consequences that your employees face because of your decision-making. They may lose their jobs if your business is struggling, along with many smaller obstacles along the way.
Being a landlord is similar. You need to take care of the property and any bad financial or maintenance decisions you make could leave you in a sticky situation. Your tenant may face the gravest consequences if you cannot find a way out.
3. You're Always On Call
One of the major benefits of employment at someone else’s business is that you are probably not indispensable unless you are at a chief-executive level. As such, you can turn it off at the end of the day and wind down. Unless you’ve been told in advance that you’re needed on a weekend, you don’t have to be available.
As a small business owner, however, you have to always be on call. Anything that goes wrong may require your input. The only times you can be completely unavailable is when you have specifically made plans to give someone else decision-making power.
Being a landlord is similar. Anything can go wrong at your property and, while you can hire a property manager to take care of a leaky faucet, you have to be available in case of a major emergency like a house fire or break in.
4. You Can Lose Everything
As an employee at a company, you might face unemployment and financial issues if the company goes bust. But you can pick yourself up and move on. The owner of the business, on the other hand, loses everything they’ve invested in the company, from massive amounts of capital to thousands of hours of hard work.
Landlords face similar consequences. If a tenant cannot pay rent, and you cannot find someone to replace them, you may struggle to pay your mortgage and other landlord expenses. You stand to lose your property in a worst-case scenario.
5. No One Else Understands The Pressure
Everyone needs to work hard to succeed in our society. There are people at all career levels who face major struggles. An individual with a low-pressure job may have greater obstacles in their way than someone trying to run a business.
But running a business comes with a particular kind of pressure that few people can relate to. Even your loved ones may not understand why you are so stressed or bring work home every day.
The same is all the more true for landlords. People who have never owned a rental property tend to underestimate the amount of work involved. They don’t understand that there are pressures they simply can’t relate to. You can feel very alone sometimes.
Being a landlord is not for the faint-hearted. The term ‘passive income’ is a misnomer in this regard. You are certainly not just sitting around watching the money pour in.