Be a Landlord

Looking to make some extra cash on the side? Interested in generating some “passive income” like all those financial gurus are talking about? Well I have the perfect solution for you: shell out a bit of your savings to buy a house and become a landlord!

Renters are some of the dumbest people out there, “paying somebody else’s mortgage.” As a landlord, you can take full advantage of these fiscally irresponsible individuals. Renting property is practically free money; it’s foolproof. Let’s take a look at a simple case study:

The first step in becoming a landlord is owning a property you can rent. For example sake, let’s say you’re a high roller and have $250,000 sewn into your mattress that you need to spend before the feds find it. You shell out that $250,000 on a $250,000 house, and because you had a really good lawyer and some other hook-ups who work for free, you don’t have any closing/ancillary costs. Also, you have no interest on a loan because you paid in cash.

Cool, you now have a house. Next step is to find someone(s) to rent your property. Let’s say you put some ads out on Craigslist and you find someone to start his lease one month after you purchased the house. Great. Now how much do you charge him?

A quick Google search suggests charging 0.8% to 1.1% of the home’s value per month. Let’s assume you get lucky and your tenant is super desperate. He agrees to pay $2750/month (1.1% of the house’s value).

Great! You now have a property and a tenant. Everything is looking good, but now you start to wonder: how long will it be before I start making a profit (profit shall be considered to begin when money made – money spent > 0)?

Well that’s a simple calculation, even a business major could do it! It’s just $250,000/($2750). You’ll break even in 7.6 years. Thereafter, you’ll be reaping in a hefty $33,000/year profit!

However, you actually won’t break even in 7.6 years. Even with the super optimistic sequence of events listed above, you’ll have some ancillary expenses.

First, let’s look at property tax. The average property tax rate in Erie County, New York, as a percentage of the property’s value, is 2.58% annually. You’ll need to dock that from your monthly rent income, and it equates to $538/month (assuming the value of the lot your house sits on is $0). This brings your net income down to $2213/month and extends your breakeven to 9.4 years (113 months).

Oh, and although you’ve been lucky to this point, you weren’t so lucky to have the same tenant rent from you for the entirety of your “payback period.” Let’s say your tenant turnover is every two years (which I would imagine is fairly typical), and for every turnover, you spend one month without income (including the first year, remember it took you one month to find someone to rent right off the bat?). Also, let’s assume you pay to have the house (at the very least) professionally cleaned in between tenants, at a cost of $300.

With tenant turnover, your monthly income drops to approximately $2108, increasing your payback period to 9.9 years. In addition, you’ll probably have to make some sort of update to your house over the 9.9 year period, and you’ll likely have to pay for a lawn care and/or snow removal service (which may average about $30/week or $120 per month, which alone would extend your payback period to 10.5 years), so let’s round the payback period to 10 years. Thereafter, you’ll net around $25,300/year.

Let’s say that instead of buying a house and becoming a landlord, you dumped your $250,000 of mattress cash into an S&P 500 index fund and sat around with your thumb up your ass for 10 years. Back in early 2011, the S&P was at 1258. In early 2021, the S&P was at 3703. So, after 10 years, your investment of $250,000 would be worth $735,890. But why would you do that when you could become a landlord??