How To Know If You’re Really Ready To Become A Landlord

February 06, 2025

Becoming a landlord can be a great way to grow your wealth and develop a way to earn income “while you sleep,” with less chance of wild swings in value that can happen when investing in the stock market. However, there’s more involved than just finding the right property, so it’s important to make sure you’re truly ready.

Don’t base your decision on this

Deciding whether to become a landlord or not actually has very little to do with the real estate market. And that’s why so many people make bad decisions in this area. They base their decisions on what they think the real estate market is going to do, when instead, they should be looking at their own financial situation to make a decision.

Can you answer yes to most of these questions?

If you can answer yes to all or most of these questions, then you may be ready to invest in real estate:

  • Do you have a stable job and a decent cash cushion? Ideally that would be 1 year plus of your living expenses in a liquid account that you can tap into immediately with no or very minimal penalty (i.e., it’s not in a retirement account).
  • Do you have excellent credit? A credit score of 750 or above will help in two ways:
  1. You’ll qualify for better loan rates if you need a mortgage to buy your first property, and
  2. If you end up having more vacancies or home improvement expenses than you expect, you will have better access to credit to cover these expenses if need be.
  • Are you really ready to become a landlord? Ideally you would enjoy that responsibility and/or you can cover the costs of paying someone to maintain the property like a building super who can address issues that tenants face and ensure the property is properly maintained. This becomes very important when you are ready to sell, not to mention it is your legal obligation as a landlord to maintain the property for tenants.
  • Are you looking for a good tax shelter to offset income taxes and capital gains? While all of us want to reduce taxes, investment property can be particularly attractive for those who are in a high-income tax bracket. Some ways you can take advantage of this are through write-offs on such things as mortgage interest, property tax, gardening, property management, etc. You may also be able to write off as much as $25,000 in real estate losses against your total income depending on your adjusted gross income (AGI).
  • Are you able to separate your emotions from the process and buy for purely financial reasons rather than personal preferences? Remember, you won’t be living in this property so whether or not it’s your favorite style of architecture is irrelevant. But whether or not you have a positive cash flow (meaning your rental income exceeds mortgage and other property expenses) is very important. So, you need to be ready to cast aside a love of real estate as an art form and cultivate a love of it as an investment vehicle in order to be financially successful.

Bonus criteria, although not essential

  • Do you have a spouse with a stable job? This further reduces risk of a major cash flow problem if you lose your job.
  • Do you know a lot about real estate and/or have people around you who are experts in real estate and can advise you? Key knowledge areas include:
    • home improvements/renovations that are most likely to enhance retail value;
    • understanding of rental and vacancy rates in the area you are looking to buy;
    • trends in real estate prices and key facts about the neighborhood and how the local economy may impact future housing prices.

Real estate agents can help here, but it’s nice to have people with expertise that you know and trust on your side as well. This is why large real estate investors have teams of people who work for them.

Think twice if you answer yes to any of these questions

Remember, finding a good deal on a property is just part of being ready. If you answer yes to any of these questions, you could find yourself in dire financial straits regardless of how prime the property may be.

  • Are you stretching to buy the property, or do you have any reason to believe that your job is not secure? If your debt to income ratio begins to exceed 35% after the purchase, then you are stretching. If you do not have a liquid cash cushion (1 year plus of your living expenses is recommended) and would have to tap into your investments to cover a financial emergency (e.g., longer than expected vacancies, roof begins leaking), you are stretching and until you develop this cash cushion, you should probably not purchase the property.
  • Do you enjoy a life free of hassle and try to limit your responsibilities? In other words, you don’t want to be tied down. In this case, it doesn’t matter how attractive the deal is, you may not be ready to be a landlord and buy an investment property.
  • Do you have fair or poor credit (below 700)? In this case, you may not even qualify for a loan. Or if you do, the interest rate could significantly drive up the cost of the mortgage and make the property a money pit where you are consistently paying more in mortgage than you are getting in rent.
  • Are you already heavily invested in real estate relative to other assets? “Heavily invested” meaning 20% or more of your wealth, not including your primary residence, is tied up in real estate. This is particularly important if most or all of your real estate holdings are in one area — if housing prices plummet in that area, you could run into serious financial problems.

Making the best decision for you

Rental income can be a great way to diversify your retirement income sources, just make sure that you’ve laid the proper financial foundation before taking the plunge into investing in real estate.