The curse of the landlord

First, let me tell you that if you're interested in owning property, being a landlord is not all it's cracked up to be, and it's certainly no way to get rich. In fact, when I was a landlord, I considered myself more cursed than blessed. I know people who own dozens of houses, and they are barely getting by. Not only because it's very hard work and a huge responsibility, but because they haven't figured out how to unlock the vault inside those houses.

Let me illustrate with this example. One investor I knew bought smart. He purchased his rental properties on land contracts, using the owners as his personal bank. In other words, he signed a contract for deed with the sellers of the properties. They agreed on payment terms, and he paid them monthly, instead of paying a bank. His payments were low enough that his rents substantially covered their total sum, and he was bringing in a decent profit each month. He had a twofold problem, though.

One, his average land contract carried an interest rate of 8.5% to 10%. Now, many mortgage brokers, and even some poor investors, will tell you that the rate on a rental property doesn't matter nearly as much as the difference in your payment and what you receive on rent. I learned the hard way that this could not be more wrong. Imagine the difference in his payments at even 7%, which is not unreasonable for a rental property (lenders give higher rates on investment properties, as they consider them a risk, because the borrower doesn't live in the house). Consequently, when the previously mentioned investor did not refinance into a conventional bank loan at a lower interest rate, he cost himself a lot of money on each of his 17 houses.

Problem two for this investor - he didn't use the equity in the homes. Imagine knowing what you know now about home equity and how easy it is to borrow it with interest-only payments and owning 17 houses, all with paying tenants. Hopefully, you're already doing the math in your head.

Now, rentals are usually valued much lower than owner-occupied residences. So, let's assume that all of these 17 houses

"I learned the hard way that this could not be more wrong."

were worth $60,000, and the investor owed around $30,000 on all of them. If a lender will loan even 70% of the value, which is not unreasonable, that's $12,000 on each house ($42,000 minus the $30,000 owed). Now, a lender won't give a prime rate on this loan, but the investor could probably get prime plus 2%, or 6.25%. His payment on one of these loans would be $62.50. But, remember, he can do this 17 times. This gives him $204,000, with monthly payments totaling $1,062.50. His rents on the properties will more than cover this. Imagine all a savvy investor could do with this amount of money.

So, why not get some cheap property, let it increase in value, and do what this investor did not do? Because you would still be a landlord. The management woes are overwhelming, especially if you own a lot of property, and it's too easy for people to walk out and leave you stuck with the mortgage and no income to cover it.

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