6 Things to Consider Before Becoming a Landlord

Many investors consider rental property investing at one point or another. Some of them go on to spend the rest of their lives as landlords, while others decide it's not the right path for them. If rental property investing is on your radar, it can be hard to know where to begin. Here are a few things to consider that may help you decide whether becoming a landlord is the right investing move for you.

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When many people hear the term "landlord," they immediately think of long-term rental properties. That may be because investors with short-term rental properties are often referred to as "hosts," but vacation rental owners are landlords, too. If your property is in an area that people frequent for travel -- whether for vacation, business, sports, or even medical treatment -- you may want to consider becoming a short-term rental landlord.

Vacation rental owners tend to be able to charge more over the course of a month than they could for the same property as a long-term rental, but all that turnover also means more work and expense. Look at what comparable vacation rentals are charging in your area and compare that to the long-term rental numbers. Then consider the expenses and time demands for each scenario and think about what makes more sense for your situation.

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If you're searching for rental properties, it can be easy to get caught up in the excitement when you're sure you've found the perfect place. Maybe it needs just enough work to be affordable, but not so much it'll take forever or cost a fortune. And you can already see how adorable it will be and are sure tenants will line up.

But you'll want to be sure to find out what the vacancy rate is in your area and what similar properties are renting for. Then account for your mortgage and closing costs, any renovations you would want to do, taxes, insurance, maintenance, and turnover costs. Would renting at around the going rate leave a profit? If so, will it be enough to be worth the effort? You'll also need an emergency fund for the rental property, just like you most likely have in case the unexpected happens at your own home.

The bad news for potential rental property investors is that we've been in a seller's market for quite a while now, and that doesn't appear to be changing anytime soon. So, affordable homes in desirable areas can be hard to find. But it's still worth taking a look at what's going on specifically in your neck of the woods. What are the current local trends with home prices?

And don't forget that location, location, location is more than a real estate cliché. A fancy property in a less desirable area may not bring in the rent a more humble property in a prime part of town can. Most people like to be within a few minutes' drive of stores, restaurants, and other conveniences, but not so entangled with all that action that they have tons of traffic and noise to contend with in their own neighborhood.

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You may have to reach out to your tenant if they aren't doing their part. That could mean always paying rent late, letting the yard get overgrown if they're responsible for cutting it, or even having loud parties police have responded to. You could find yourself with a tenant who calls constantly over every minor thing. You may even have to evict an unruly or nonpaying tenant as a last resort.

Consider how comfortable you would be dealing with those situations. If the answer is "not very," that doesn't necessarily take rental property investing off the table. And the same is true if you simply don't have time for all that. A rental property manager can handle all of this and more for you, making your investment more passive.

They can do the same for vacation rentals but tend to charge more for those since the high turnover tends to make those properties more work. It may be worth finding out what reputable property managers in your area charge and crunching numbers again to see whether hiring one could make sense for you.

Like most investments, renting out your property comes with plenty of risks you'll need to consider. Tenants may stop paying for one reason or another and refuse to leave, destroy your property, or even turn the place into a crime scene.

Fortunately, there's a lot you can do to protect yourself. This includes getting a security deposit, making sure you have plenty of insurance coverage, having a real estate attorney assemble or go over your application and lease, and performing thorough tenant screening. Skipping any of these steps could come back to haunt you later.

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And speaking of risks, the height of the pandemic brought new worries for potential landlords to think about. For long-term landlords, that came in the form of eviction moratoriums. While all that rent was still due eventually and programs were put in place to help, many landlords were ultimately left holding the bag.

Vacation rental owners were also hit hard during the same period, thanks to lockdowns and the safer-at-home lifestyle. Things are currently looking up in both areas, but no one can say for sure that none of that will be repeated. Landlords will want to be prepared for the possibility of having to ride out a few months with little to no rental income. Rent guarantee insurance may be worth looking into.

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Choosing the right investment for you is important. You could invest in stocks, bonds, mutual funds, crypto, or even the metaverse. And if it's real estate you're after, real estate investment trusts (REITs) are a more passive way to invest in as many real estate sectors as you like, including long-term rental properties. More interested in vacation rental properties? Then you may want to consider Airbnb.

The point here is not to dissuade you from investing in rental properties directly. Many landlords are very happy with their investment choices. Just be sure to weigh all the pros and cons, crunch those numbers thoroughly, and weigh all your options before becoming a landlord.

Nell McPherson has no position in any of the stocks mentioned. The Motley Fool owns and recommends Airbnb, Inc. The Motley Fool has a disclosure policy.