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6 Ways We Survive the Dark Side of Rental Real Estate

My wife and I purchased our first home to be used as a rental property seven years ago. That move was the culmination of several years’ worth of reading about and planning to own rental real estate. It took us that long to feel knowledgeable and confident enough to put a plan into action that would earn us a steady income stream aside from our normal careers.

For the most part, our experience has been a positive one. In fact, I’d say overall it has been great. However, we have had our share of challenges along the way, like:

rental real estate…an unexpected new well we had to drill and install (that was pricey!)

…leaky copper pipes that had to be replaced in an entire house

…a dual tenant situation where one roommate left, leaving us with half the monthly revenue stream on that property until another roommate could be found

…tenants who don’t inform you of repair issues in a timely manner (“Really? It’s been leaking how long?”)

…tenants who won’t pay on time, or ever

…tenants, who by their actions force you into court (that’s a post in itself!)

…managing the finances to account for repairs, taxes and the house that sits vacant for months while you do said repairs or find a new tenant

…dealing with the emotions that come when facing these tough circumstances

…the time it took away from our already busy schedule to take care of all this

Are you prepared for all that and more? If you are game, then I have five suggestions that will help you manage through some of the dark times that will inevitably come. And I’ll tell you the sixth thing we’ve done recently that has taken our rental real estate business to the next level.

Approach Rental Real Estate With a Business Mindset

This one comes first because I can’t stress it enough. Don’t enter this endeavor with a whimsical, ho-hum attitude. It requires more than half-hearted effort. As I mentioned, we spent two years doing research. It may not take that long for you but it’s absolutely necessary to think this venture through and evaluate the pros and cons.

Too often homeowners who are struggling to sell their home decide to rent it without understanding the implications of that decision. They throw their hands up in desperation and say “I guess we’ll rent it,” fully assuming it will be easy and require little time. They rent to whomever, without doing background or credit checks just to get someone in their property.

You need to run rentals as a business with a full understanding of funding, return on investment, depreciation, property taxes, building codes and legal responsibilities. Do this even if you decide to rent to a family member or friend (which is very risky and filled with potentially damaging relationship issues).

Related Content – How to Be a Successful Landlord: 5 Key Areas to Focus On

Have Sufficient Capital to Back Up Your Business

This is my #2 suggestion because rental real estate can be a money-eating machine. From the purchase price to the pre-move in repairs to the continual maintenance, it seems like money is always flowing into the property. That’s why a landlord should have the necessary cash reserves already secured to maintain their investment.

I would not run a rental real estate business unless my financial life met the following criteria:

  1. No debt (other than the mortgage on my personal residence)
  2. A 3-6 month personal emergency fund
  3. Could put at least 50% down on the property – preferable paying in full with cash
  4. A minimum of $10,000 saved in the business account for continuing repairs after the purchase

That may seem like overkill, especially the paying in full with cash part. But, it’s imperative to get your personal financial house in order first. And the best part is all those suggestions are doable, given time to let them happen. There is no rush to buy your first rental house – properties will always be available. You will enhance your chances for success and greatly reduce your stress levels by building a strong personal financial foundation first.

Conduct a Home Inspection Before the Purchase

This seems obvious but many people in rental real estate miss this critical step because they get caught up in house buying fever. A home inspection is not the buyer going around looking at the attic and the crawlspace. That’s akin to just kicking the tires on a used car.

Spend money on a certified home inspector who is trained to see things you’ll never think of. The expenditure is well worth it as they can keep you from making a 6-figure mistake on the purchase of a house.

Use a Clear Contract For the Rental and Never Violate It

We are not just shaking hands with the tenant on this deal. Hire a lawyer to draw up a legal contract that outlines the expectations of the tenant and the landlord. You can also find quality contracts online. Whichever route you take, make the contracts as detailed as possible.

Some obvious questions to ask and outline include:

When’s the rent due?

What happens if it’s late?

When does the landlord make repairs?

Can the tenant have a roommate?

Do they have to tell you they have a roommate?

When does the eviction process start?

Can they have a pet? A pool? Can they smoke? Hang pictures?

View your contract as a positive for tenant and landlord. We have been saved on more than one occasion by the language used in ours. The main reason is that I, as a landlord, have never violated it. The contract is a legal document and I am bound to it. I had better follow through on all my responsibilities or the tenant may have legal recourse against me.

Related Content: Simple and Fun Ways Landlords Can Treat Their Tenants Well

Make Timely Repairs at the Property

Respond to major repair issues immediately. It’s the landlord’s responsibility to work in good faith with the tenant to insure the dwelling is habitable. If you drag your feet and neglect repair requests the tenant could again have recourse against you in court.

In some places of the country, you will have to fix your air conditioning or heating immediately. Water always has to be present and flowing in the house. That leaky roof cannot wait until you return from vacation. You might have to make a phone call from the beach to contractors back home to get over to the property and inspect the situation. Are you prepared for that kind of pressure?

Quit Managing the Property Yourself

I said we have done something recently that has taken our rental real estate business to the next level. In short, we have quit managing our properties. We have hired a professional management company.

There are some drawbacks to management companies. For starters, there are fees for their services. There are upfront fees they assess for finding new tenants and fees they assess on a monthly basis. Of course, this eats into your monthly profit.

Additionally, you don’t always know who is living in the property. The tenant never meets us as we are removed from the screening process. That might be a little unsettling for some.

But for us the pros clearly outweigh the cons. We wanted some separation from the tenants. Before we were property owners and property managers, making all decisions up close and personal with the tenants. That took time.  Sometimes, those face to face meetings also became emotional.

Now we are simply property owners. The tenants have no idea who owns the property. They can’t reach us. If something needs done at the property, they contact the management company who gets in touch with us.

They also do a quality job of screening for new tenants. They have specific criteria for who can and can’t rent the property. For us, this really helped take the emotion out of our decision making. No more feeling sorry for or wanting to help people who are down on their luck.

Furthermore, because this is a professional management company, they have a better idea of proper pricing in the area. After talking with them, we realized we had been renting our properties below market value. So now we are actually bringing in more money than before even with the monthly management fees taken out.

Hiring a professional management company may not be for everyone, though I’d highly recommend it for people with multiple properties. You will be more relaxed and can devote time to more important things like work and family.

We’ve had great success with our rental real estate business. It’s provided a great source of income mostly because we’ve managed and run it properly. There are risks and considerations, however, that must be taken seriously before you commit your hard earned money and your time to this endeavor. Take your time learning about it so you can avoid some of the pitfalls that trip up so many landlords.

Questions: Does rental real estate interest you as an income stream? What other considerations should a potential landlord consider? Do you have a management company overseeing your properties? If so, how has it been a good experience? What landlord/tenant horror stories do you have?

Photo at FreeDigitalPhotos.net

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Comments

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  2. Very informative post. I like your guidelines of financial things to have in order before you jump in. I would love to get into the rental game, but I would also love to pay off these student loans. Thanks for sharing your experience.

    • Thanks for the comment Syed. The financial side of being a landlord is critical. You expose yourself to risk by owning property and letting others use it. There will always be repairs and upgrades that need to happen. Not to mention if you take out a loan to buy your rental, you expose yourself to debt risk. So yes, you have to have a very firm financial foundation in your personal life before you venture into this business. And by all means, take care of the student loans first. 🙂
      Brian recently posted…How to Get Out of Debt and Win in Five Simple StepsMy Profile

  3. Were most of your rental properties purchased as foreclosures and how did you go about building your portfolio of properties? My wife and I have one that we used to live in and now rent out and are trying to buy another one and are interested in what you think.

  4. You might have seen some of my posts about our dabbling in rental property – our first house we bought with a plan of renting out part of the house. We bought a house last October and have a nice little basement studio apartment (separate entrance, walk-in closet, their own bathroom, and shared laundry room with us). We had our first renter from Feb – July who left because she thought it was too expensive. We honestly were charging well below what market rate is, so we were fine with her leaving as we raised the rent $50/month. We put in a lot of time and about $800 of work before our next renter moved in (just last weekend!) and I can definitely agree that you need to have everything in order and be prepared for taking on a renter. Anything can go wrong at any time, and you need to be willing to respond. I’d recommend it, but only if you are willing to put in the effort to manage it properly.

    • I did read some of that DC. Renting out dead space (like a basement) you are not using is a great way to make some extra income, as long as you can deal with the closeness (proximity) of the tenants. Sounds like it’s going OK for you to this point. At least it is staying rented.

  5. I’m curious, if you were to rent out to a group of non-married 20-30 somethings, would you prefer to rent to men or women? Conventional wisdom would say that women are cleaner…but an old boss of mine owns 5 properties in Texas and he greatly prefers to rent to men. He says the walls and floors do get dirtier, but he has never had expensive, damaging repairs left unattended by a group of guys in a house. What’s your thoughts?

    • Ahh…now we are getting into gender psychology. I love it! I may get smacked around a bit by the women who read here but I would say, in general, men are fixers. If they see something that needs to be repaired they will dive in and get it done sooner rather than later. Younger 20-30 something women may feel intimidated or worried to contact the landlord until absolutely necessary. We had a roommate situation with two women in that age range where a couple of things were not brought to our attention. Not big deals, but something that we should have known about sooner.

      That being said, I still wouldn’t hesitate to rent to a woman if she had a clean background and credit check and was financially qualified for the property. The tenant I just took to court to get him out of a property was a guy.

  6. Love the tip about using a clear contract, and also the part about approaching it as a business. Dear friends of our just lost out on over 10k due to a crummy tenant. They are proceeding with collections, but who knows if they’ll ever see that money again. It’s important to understand that this is a business deal and that losses can happen.

    • That’s awful, but I’m afraid not uncommon. If they take that tenant to court for violation of the contract, they may be able to get a court order to garnish wages to get some of their money back. That would be the route I would take. Better get a good lawyer for that one.

  7. We have a rental and we’re pretty satisfied with it, but largely because we’ve done a lot of what you recommend. Repairs aren’t options and you need to have a good enough repoire with your renters that they’ll tell you when something happens.

    • I’ve heard of too many landlords becoming upset about doing repairs or refusing to do them altogether because they weren’t necessary or they didn’t want to spend the money. Repairs are part of the ballgame – accept it. Again this should be something that is laid out in the contract – who is responsible for what. We have a policy written into our contract that the tenant is responsible for any repair under $50. That keeps us from having to run over anytime they need to replace a light bulb or a filter cartridge.

  8. I’ve always been enamored with the idea of being a landlord ONLY for the extra income stream. But I’ve been reading a lot about the negative sides of having a rental property, and I’m definitely have second (and third and fourth) thoughts on the matter. This is a great guide and I’ll be taking your suggestions under consideration!

    • The first step has to be getting your personal financial life in order. I just don’t see a viable path for investing in real estate without the necessary capital to back it up. An investor brings on too much risk otherwise. I would suggest taking your time to read and learn as much about it, including the landlord/tenant laws in your state. The laws in Georgia are very friendly to landlords. That’s not the case everywhere in the country.

  9. Shannon Ryan says:

    Just like any investment, there is the good and the bad. 🙂 We don’t any rental properties and it’s not something that is high on our list, right now. Property is expensive in LA and I agree that you need to be able to put down a pretty significant down payment so you can actually make a profit renting it. And I’m just not sure if I want to be a landlord.

    • We’ve been fortunate to have picked up some incredible deals via foreclosure, but I can see how the market would be entirely different in suburban Atlanta than in LA.

  10. I am interested in real estate, but I don’t really want to be a landlord. It just doesn’t rank very high on my list and your reasons are why.

    • Hiring a property management company might remove you, as the owner, from having to deal directly with the tenants. That eats into profits a bit but may be worth it in the long run.

  11. I haven’t had any true horror rental stories yet, except for the tenants showing up really drunk on move in day. We use property management at the moment, so they actually dealt with the worst of it. We gave them another chance the next day and they have been fine ever since.

    I think going into the process with eyes wide open is important. We shelled out an extra $500 for a good inspection, and I think it was worth every penny. We also know there are some non-urgent repairs and upgrades we will have to make within the next 5 years. I think having a positive cash flow is very important, not just breaking even. We do have a mortgage, but it’s very small and we could easily make the payment if we had to if we weren’t able to collect rent for a while. If the expenses will really strap you financially, I would say pass until you are in better shape.

    • Showing up drunk on move in day…that’s hilarious and sad all at the same time. You are 100% right…the more positive cash flow the better. This is what really hurts people. They only make enough to barely cover the mortgage and then don’t have enough saved to manage repairs. That’s why I made the crazy suggestion of paying cash for a house and having a business savings fund fully loaded before taking the plunge.

  12. Rental real estate is something I am interested in, but I think I would rather start small first. I’m hoping (way down the road) to buy a house with a basement that we can rent out. Just to get a feel for it and see if it’s something I would really like to do. It requires a lot of effort and money, and I would hate to invest so much only to find out it’s too much to deal with. You should write a post about the tenant taking you to court! Some people…

    • I’m going to write about my court drama at some point. Utter ridiculousness that I was forced in that direction. Starting small is exactly the way to go E.M. One property at a time and one that is definitely affordable. I’ve known people who have rented out their basements. I don’t know if I could do that…I’d prefer a bit of distance between myself and the tenants.

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