(BLOOMBERG) – Should you be a landlord? That’s a question some middle-class young people may be asking themselves lately. As millennials ease into early middle age, those with a bit of money saved up will be looking to park it somewhere.
But they should be fully aware of what they’re getting themselves into. Housing, historically, has been one of the best investments available, offering returns almost as good as the stock market: This financial return includes the rent housing earns.
Of course, people who live in owner-occupied housing also earn the full return, because they save money on rent. But owning multiple rental properties can be even more lucrative.
Property is also an easy investment for normal people to understand. The intricacies of corporate performance and the swings of the market make stocks a forbidding prospect for the average investor, except through an index fund or managed retirement plan.
But practically everyone has lived in a house or apartment; most of us understand the requirements of maintaining a liveable space. Houses are a tangible, simple asset whose value is readily apparent.
However, being a landlord also has its financial downsides. One of these is risk. Landlords tend to be highly leveraged, so failing to sufficiently fill a rental property for even a short amount of time can be ruinous.
A local economic downturn can crush the value of a property investment. And if a landlord also has another job in the same area where they own rental properties, the same economic downturn that threatens their rental income will also adversely affect their earnings. Thus, being a landlord can reduce diversification.
Some people on the political left consider being a landlord immoral. But there’s nothing inherently wrong with owning rental properties.
If you refuse to buy and let out a property, it won’t help push the government to implement a social housing programme. Neither will it raise the national home ownership rate.
Some other landlord or property management company will simply buy the house and let it out instead. And most landlords are far from being lazy bums – maintaining a property takes work.
But before deciding to become a landlord, it’s also worth considering how such an avocation and investment strategy might change your lifestyle. Some of those changes might not be positive ones.
Landlords and tenants have an asymmetric power relationship. Although it’s often difficult and laborious, a landlord can generally evict a tenant for not paying rent, as well as for various other violations.
As sociologist Matthew Desmond vividly describes in his book Evicted: Poverty And Profit In The American City, eviction is a traumatic experience, especially for children. It upends people’s whole lives, and deprives them of one of the most basic human needs – the need to know that one will have a place to sleep tomorrow.
In contrast, the worst thing a tenant can typically do to a landlord is to move out, forcing the landlord to either find another tenant quickly or lose money. Tenants don’t have zero bargaining power with respect to landlords, but there’s really no comparison between making someone lose money and making them lose the roof over their heads.
If you choose to become a landlord, therefore, you might have to deal with a family that, through no fault of its own, falls on hard times – perhaps because of an unexpected medical bill or loss of a job.
At that point you’ll have enormous power over other people’s lives. You’ll have to decide whether to let yourself lose money – perhaps so much that you have to sell the property – or kick an unfortunate family onto the street.
Being a landlord can also change a person’s politics. As someone who makes money both from rent and price appreciation, your incentive will be to support any policies that raise either rents or property values.
Research shows home ownership increases political participation, so it’s highly likely owning rental properties exerts a similar effect. No matter how much you might idealistically believe in making housing more affordable, as a landlord you will have to constantly struggle against your own financial imperatives.
Unlike simply putting your money into an index fund, owning rental properties forces big lifestyle changes. It’s often a good financial move, but there are clear reasons why some people might shy away from it.
• Noah Smith is an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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