If you don’t have cash to burn, don’t act like you do.
Consider this: Henry Homeowner decides he’s going to take his savings and purchase a rent house in order to generate passive income. After liquidating his savings to cover the purchase of the house, a few repairs, and a little marketing to get it leased, Henry is now beginning to see rent payments flow into his account. Life is good.
However, Henry Homeowner did not expect his tenant to lose his job. He also wasn’t prepared for 6 months of non-payment of rent. Now, Henry has two mortgage notes, the first one for his own home and the second one for the rent house. His savings are down to Zero, and his tenant is thinking about declaring bankruptcy.
This is very simple math. If your budget requires that monthly rent payment for your budget to work, you shouldn’t be in the landlord business. You cannot be a successful landlord if the rent payment isn’t producing extra income, or if it’s not producing it at a rate fast enough to replenish your savings or to fund the potential for non-payment, which exists in every landlord/tenant agreement. You have to be financially prepared for your tenant not to pay rent. It’s too high of a risk otherwise.
However, if you can get by just fine without a rent payment for six months or a year, then the risk factor for you is low enough to insure security in this business. No one should wait a whole year before evicting a tenant who won’t or can’t pay, but having that financial cushion diminishes the possibility of wasting money in the desperate hope to stay afloat.
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