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How to Survive the Dark Side of Rental Real Estate

Four years ago my wife and I purchased our first home to be used as a rental property. That move was the culmination of several years’ worth of reading, discussing and planning about 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 daily professional jobs.

For the most part, our experience has been a positive one. Notice I said “for the most part.” We’ve had our share of challenges along the way, like:

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

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

…the dual tenant situation where one roommate left, leaving us with half the monthly revenue stream coming in 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 repairs or find a new tenant

…the emotion that comes when facing these difficult circumstances (“Serenity now!”)

…the time it took (eating into an already full schedule) to take care of all this.

Still want to be a landlord? Then consider these suggestions to help you manage through some of the dark times that will inevitably come.

Approach Rental Real Estate With a Business Mindset

This one comes first because I can’t stress it enough. This endeavor should not be entered into in a whimsical manner. It requires more than half-hearted, ho-hum effort. As I mentioned, we took the better part of two years to research what it meant to be a landlord and come to an understanding of whether it would be a right fit for us at this point in our life. It may not take that long for you but it’s absolutely necessary to think this through, evaluating the pros and cons.

Too often homeowners who are struggling to sell their house 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 an easy venture that requires little time and hassle but will result in big profits. They rent to whomever, without doing background or credit checks just to get someone in their property. Then, the owners get burned by the less than qualified tenants who won’t pay or who destroy the property (or both!).

Rentals have to be run as a business with a full understanding of funding, return on investment, depreciation, property taxes, building codes, legal responsibilities, etc. This is true even if you decide to rent to a family member or friend (which is very risky and filled with potentially damaging relationship issues).

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 so as to have no mortgage debt on the property)
  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 at the car lot.

You need to 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 (or find one online) that outlines the expectations of the tenant and the landlord. Make it as detailed as possible.

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?

Contracts should be viewed 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. If it says it in the legal document then that is what I am bound to do. And I better follow through on all my responsibilities or the tenant may have legal recourse against me.

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, that means air conditioning or heating has to be fixed 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 your roofer back home to get over to the property and inspect the situation. Are you prepared for the pressure of that type of responsibility?

The rental real estate business can be a great source of income when managed and run 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.

Questions: Are you interested in rental real estate as an income stream? What landlord/tenant horror stories do you have?

Photo at FreeDigitalPhotos.net

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Comments

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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.

  9. 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.

  10. 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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