Being a landlord of a rental property can be an excellent way to invest your money because of the financial and tax benefits. However, it involves quite a lot of work, and the responsibility of property management, keeping track of maintenance, and dealing with tenant complications can quickly become a headache.
The high level of effort that comes with maintaining rental properties may become a burden, particularly if there is no steady cash flow. If you don’t want to be a landlord anymore but still want to reap the financial benefits of investing in real estate, other options are available. This article analyzes the top reasons landlords become tired of owning property and shows how you can maximize your income without directly managing rental units.
5 Reasons Why You Might Be Tired of Being a Landlord
Managing a large rental property or several smaller properties can be overwhelming. Let’s look at five reasons why you might be at your wits’ end when it comes to rental property ownership.
1. Property Management Company Issues
Some landlords will use property management companies to manage the primary tasks of owning a rental property, such as maintenance and dealing with tenants. Hiring a property management company is an added expense that cuts into your investment profits and could make it more difficult to build your wealth.
Additionally, a property management company may not be as selective as landlords when approving tenants, and they may take on more clients and rental properties than they can effectively manage. If you hired a property management company to manage your investment but are frustrated with their performance, you may consider selling your property to leave the landlord business.
2. Problems With Tenants
Tenant issues are a completely unpredictable factor that can lead to many complications for landlords. Though some tenants are clean, reliable, and require minimal attention, this is not always the case. One or two bad tenants who always pay their rent late, damage the property, or fail to follow the rules of your rental agreement can easily become a nightmare for even the most patient rental property owner.
Tenants who skip rent can even cause you to need a lawyer and get collections involved to recover your owed income. You may also experience other issues with tenants, such as disputes between renters, noise complaints, and other violations that take up your time and energy.
3. Intensive Renovations Required
Maintenance issues can be one of the most costly and time-consuming matters on any rental property, particularly if your unit is older. As the property ages, it will need more upkeep, such as new flooring, A/C units, or updated appliances. Over time, you may need extensive renovations to fix plumbing issues, roof leaks, structural wear, and damage.
Natural disasters such as hurricanes, flooding, or tornadoes may cause fire or water damage, leading to a lengthy insurance process to modify the property to keep it up to code. All these issues can take a toll on your bottom line and your patience, making your investment seem like more work than it’s worth.
4. Time Commitment
You may have become a landlord as a way to invest your money during your retirement or create passive income. However, being a landlord requires an intense time commitment. Issues with maintenance or disputes between tenants can arise at any time. If you don’t have a reliable property manager, you may be the one who has to handle the issues that occur at 3 a.m.
While you can’t avoid some issues, such as unexpected leaks or damage, you may try to avoid some of them. Screening your tenants properly is critical to preventing certain problems, but it can be extremely time-consuming. Whenever there is a vacancy on your property, you need to market the rental with listings and advertisements, which can also take a huge chunk of your time.
5. Lack of Location Flexibility
The location of your rental property can affect its value and your cash flow. Your property may have been worth a lot more at the purchase price than it is today. Likewise, being the direct landlord of a property ties you to that location so you can care for the property. If you want to move or travel, your investment properties can hold you back. If market conditions seem to be heading downhill in your area or you want more flexibility and freedom in where you can live and travel, you may want to start looking for other investments.
What to Do Instead of Being a Landlord
Here are a few ways you can move on from directly managing property with the benefits and drawbacks of each.
1. Sell Your Property
One of the most simple and obvious alternatives to being a landlord is to sell your rental property or properties. Whether you own a single-family home or retail strip center, selling your property will remove the burden of responsibility and property management. However, if you divest completely, you also lose the passive income you make from your investment.
This is an important factor to consider, especially if you still want to invest in real estate. If you own an office building, managing the upkeep and ongoing issues can outweigh your desire to continue being a landlord, and you may want to sell it altogether. If you own a few single-family homes, on the other hand, you may only interact with your tenants and the property minimally, so it’s critical to think about if selling is the best option.
If losing passive income would be a significant disadvantage for you, there are alternative ways to invest in real estate without your typical landlord duties.
2. Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is ideal for investors who want to gain portfolio exposure while avoiding a traditional real estate transaction route. This investment vehicle uses investors’ funds to purchase and maintain income properties. A REIT often focuses on one type of real estate, such as hospitality, industrial property, or multifamily complexes.
With a REIT, investors can still invest in real estate without actually buying any property. The REIT purchases various properties, such as condominiums or hotels, and rents them out to tenants. Investors can purchase shares in the REIT and receive income from a portion of the rent in the form of dividends or through capital gains.
This is all without having to manage or finance the properties themselves. REITs can be a reliable alternative to being a full-time landlord because the large-scale, commercial options can provide a steady income.
REITs also allow investors to access investments that might otherwise not be feasible for an individual to purchase directly, such as office buildings, retail centers, or malls. For organizations to qualify as a REIT, they must meet specific requirements, including:
- Distributing a minimum of 90% of taxable income to shareholders annually.
- Investing a minimum of 75% of total assets in real estate.
- Generating a minimum of 75% of its gross income from real estate-related sources, such as rent or mortgage financing.
Here are some of the primary advantages of investing in a REIT:
- Diversification: Public REITs can invest in hundreds of commercial properties across many geographic locations, enabling investors to achieve more diversification and exposure in real estate than would be possible by purchasing individual properties. Investing in a large number of properties also means that a failure of one is less likely to impact your investment negatively. This access to a large-scale portfolio gives offers more flexibility than trying to build wealth by buying one property at a time.
- No capital after initial investment or management requirements: REIT shareholders have a guaranteed income and can sit back and collect dividends while the trust finds opportunities, manages properties, and secures financing. Likewise, investors can become shareholders for a potentially affordable price since they do not need to meet higher minimum investment requirements.
REITs also have a few drawbacks. Investors can choose a REIT that aligns with their investment goals, but they will not have control over the properties. Some REIT portfolios may also come with higher expenses as prices fluctuate, which can mean a lower return rate for investors. Other risks investors may face when diving into a REIT include:
- Choosing the wrong REIT: It’s important to choose a REIT that holds in-demand properties that could continue to generate rental income in an economic downturn. For instance, if you invest in a REIT with unequipped management, properties in poor locations, or asset classes that could be severely affected by a down market, you may not see as much of a return, if at all.
- Taxes: Though this is not necessarily a risk, it’s important to know that REIT dividends are taxed as ordinary income. Essentially, the investor’s income tax rate may be higher than capital gains taxes for stocks or dividend tax rates, which is something to consider.
- Interest rates: As interest rates rise, the demand for REITs declines. Generally, REITs don’t perform very well in these types of economic conditions. However, rising interest rates sometimes indicate a strong economy, which can mean higher occupancy rates and rental income.
- Potential illiquidity: Some REITs are illiquid, meaning investors cannot sell them in the market for a minimum of a few years. Usually, investors have to wait until the REIT lists the shares through an exchange or liquidates the assets. However, some investors may retrieve a portion of the investment after a year, but there’s typically a fee. These rules may differ depending if you are in a traded or non-traded REIT. For instance, in a non-traded REIT, there may be a holding period, you may not be able to find a buyer when you need to sell, or you may have to sell at a steep discount to your cost basis.
3. Use a 1031 Exchange
Suppose you’re tired of being a landlord due to unfortunate circumstances on your particular property but still want to be a direct owner and try something new. In that case, a 1031 exchange can be an alternate solution. This practice comes from Section 1031 of the U.S. Internal Revenue Code (IRC), which allows you to avoid paying capital gains taxes — sometimes indefinitely — when you sell an investment property and reinvest the proceeds into one or more properties of equal or greater value.
For example, suppose you want to sell a single-family house and reinvest in a more profitable property, such as a retail strip center. With a 1031 exchange, you can defer the taxes you would normally have to pay after the sale if there’s a gain. Ultimately, this allows investors to swap underperforming assets for high-yield ones, also known as “trading up.” However, you must follow several rules and requirements for a 1031 exchange to reap the rewards of a tax deferral.
The properties must qualify for a like-kind exchange, meaning they are both used for business or investment purposes only, such as renting. For instance, you can’t reinvest your 1031 exchange funds into a personal vacation home. The quality or value of the properties does not matter, only the use.
When you swap one investment property for another, you must follow a specific time limit. Once you sell, you have 45 days to identify one to three properties you will reinvest in. In the next 135 days, you must secure financing, negotiate contracts, and close on at least one of those properties to meet the 1031 exchange requirements. The identification and closing of the replacement property must occur by the end of the 180-day timeline.
As an investor, you may consider using a 1031 exchange for several reasons:
- No limits: There’s no limit to how many times you can do a 1031 exchange. Investors can continue to sell and exchange properties as long as they hold onto them for a minimum of two years. After that period, you can roll over the capital gain from one investment to another and avoid paying tax on these investments until you decide to sell for cash. Different types of 1031 exchanges give you more flexibility over how you want to sell and acquire your properties.
- Consolidation: Though you can easily diversify your portfolio with a 1031 exchange, you can also consolidate your investments to reduce administrative and maintenance responsibility. This means you can swap your three duplexes in different locations for a single apartment building. A 1031 exchange also allows investors to acquire replacement properties with long-term net leases where tenants are responsible for maintenance requirements.
- Build your portfolio: In a 1031 exchange, investors can use the pre-tax dollars from the sale and leverage these funds to increase their purchasing power and build their wealth through more income-generating investments and high-value properties.
- Relocation: Your local market can be one of the main reasons you’re struggling with being a landlord. Using an exchange allows you to move your investments to another state with lower taxes or a more favorable market.
4. Delaware Statutory Trusts (DSTs)
In a DST, you can invest with other investors in one or several properties. This separate legal entity enables real estate investors to acquire fractional ownership of debt and equity in a property or a portfolio of properties. This ownership allows you to receive distributions from the trust, including rental income and the eventual sale of the asset or assets. Through a DST, you can avoid the responsibilities and frustrations of being a landlord and still enjoy the benefits of being a real estate owner.
As part of a DST, though you don’t directly own the investment, you can access real estate opportunities that allow you to diversify your investment portfolio. DST entry costs are less than what you would spend buying some properties, so you could invest in several DSTs to broaden your investments.
However, DSTs do have potential downsides. You must be an accredited investor and meet certain income and net worth minimums to qualify for a DST. Additionally, being a part of this trust means you relinquish direct control of any properties in the DST, meaning you have no authority to make decisions about the properties.
There are also economic risks when investing in properties through a DST, such as unpredictable market changes or a recession. Investing in properties that receive poor care from the property manager can also affect your returns.
Start Looking Into Properties for a 1031 Exchange
A 1031 exchange provides the financial benefits you need to reinvest your funds into more profitable real estate. With 1031 Crowdfunding, you can access an extensive online marketplace of 1031 properties vetted for exchange. Our platform makes it easier to search for replacement properties of equal or greater value within the required timeline so you can defer capital gains taxes.
1031 Crowdfunding also provides all the details you need to complete your paperwork online and streamline your 1031 exchange. Register for a member account today, and you’ll gain support from our team of experts to help you through the entire 1031 exchange process and empower you to make better-informed business decisions with your investments.
This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.
