5 Things I Learned After Buying My First Rental Property.
It’s been a few months since Aja (pronounced “Asia”) and I purchased our first investment property and to be honest, it’s been a love/hate relationship. We love having an investment property, but we hate being new to the investment game, simply because we have to learn how to play! As we prepare to purchase more rental properties, it will be awesome to see our growth as we take what we learned from the first property and apply it to the next one.
In our experience, finding tenants was the easy part. We got top dollar for rent in a very short amount of time. What I thought would be the most nerve racking part we actually breezed right by, then we got into the nitty gritty. Now that a couple months have gone by, here’s what I also learned about running a rental property. Running a rental property business is actually much different than what I expected. Some things I knew were going to happen and some things caught me by surprise.
Maybe I can get Aja to write her own article?
I actually wish I could write like her, she’s extremely talented when it comes to writing.
1. You get paid to solve problems. It’s not as passive as many think
Keyword: Passive. A lot of individuals get into real estate investing with the idea of kicking their feet up and watching the checks come in. If you’re managing your own rentals, this couldn’t be further from the truth. It’s actually very much hands on. You won’t have to spend 40 hours a week at your property, but you will need to make unplanned visits to handle issues for your tenants. What’s even more interesting is that you’ll be placed with the business decision of learning how to do small repairs yourself or hire out and pay for a handyman thus adding to your monthly expenses and taking away from your expected profit.
Let’s just say I became Mr. Home Improvement overnight.
The reality is, you are now running a business and therefore will need to have a P & L statement to track your income and expenses. Your end goal is obviously to be profitable in the long run. It’s much more than just your rental income minus your mortgage payment. You will have to factor in any costs associated with running the property such as maintenance and repairs.
The moment you decide to have tenants is the moment you step into the problem-solving business. After all, one thing that stops individuals from investing is their fear of getting a phone call in the middle of the night asking them to fix a pipe that just burst and to be honest, if you were renting from someone and a pipe did burst, wouldn’t you want someone in charge to call immediately?!
Either way, it’s nothing to fear.
I’m not saying you won’t get calls, you will, however, they don’t occur every day. One week it might be quiet and the next week you’re at Home Depot like a contractor who has amnesia – always going back for something.
Or, everything can be find for 11 months out the year and the last month, the furnace stops working.
My point is, it will always vary.
Does it get annoying? Sometimes, but at the end of the day, I’d rather have this problem when the outcome is income. After all, it doesn’t become passive until you hire a property manager. I, myself, will attempt to manage up to 10 properties on my own. After that, I would like to bring in a property manager to remove ourselves completely from the day to day operations of our rental properties. That will also free up time and energy to invest in more properties.
2. I’m now in the business of mailbox money.
I’ll never forget they day I collected rent for the first time. It was the first step of my journey towards building my rental portfolio. I actually stared at the money for a while – I couldn’t believe it was true. The thought that every second, including this second and the one that just passed, I’m getting paid, is mind blowing (at least for a newbie).
It’s definitely not enough to retire off of tomorrow, but the concept remains the same, I get paid while I sleep. If projections are right, we are hoping to get a 25-35% annual cash on cash return. If no vacancies or major expenditures occur, that number will be higher, and I would be naïve to think these things won’t happen. I realized that I was in the business of mailbox money when I realized it was the 11st of the month and I had no idea how I was going to rent from the tenants. Cash? Check? Paypal? Venmo? That leads me to my next lesson learned in regards to making the rental business more efficient.
3. Your rental property should be ran like a business.
In order to eliminate me ever having to ask myself how am I going to collect rent in the future, my girlfriend suggested we set up an online system via Cozy.co (not a typo) in order to receive rent and handle the accounting department of our business. Tenants can set up their own account and link either a credit card or their bank account.
All that to point out one important concept – having systems.
In order to run your rental business efficient you will need systems – standard practices that occur over and over to keep the operations of your business moving smoothly. How will you accept rent? How will you screen tenants? Are you providing washer and dryer? If so, are they present and fully functional? Did you inspect your units before another tenant moves in and I don’t mean visually inspect just to see if things look good. I mean, did you test the water pressure? Is the water hot? Is the thermostat working for the furnace beyond the one time you raised the temperature during your home inspection?
Please do not forget this step, especially if you just purchased your home. While your home inspection during your buying process will give you a very solid idea of the overall condition of the home, it won’t give you a true impression of how the home is when the property is up and running like a normal day. Be prepared to find little nuances and you can prevent this as much as possible by developing the system to stay one step ahead of your tenants’ wants and needs.
You’ll even need a system all the way down to how you handle garbage each and every time. It’s custom for the landlords to handle garbage so can you imagine my face when I pulled up to the house two weeks after tenants moved in only to see garbage piled up in the back?!
As a new homeowner, I completely forgot garbage pickup!
These will be just a few things that you’ll need to have a checklist for to make sure that when new tenants move in, they are satisfied and they won’t be calling you for small things like “the shower gets lukewarm, but doesn’t get hot.” Unless you’re a slumlord, you’ll be forced to take care of these issues, not because they’re major issues, but because you want to make sure your tenants are happy.
Especially if they’re paying top dollar for your rental! Why would you even flirt with the idea of messing that up?
Now that I made that mistake, everything going forward will be much smoother. Especially when buying the next few rental properties.
4. Having a handyman comes in handy.
You’ll definitely need a handyman if you, yourself, are not good with your hands. Things will break and issues will arise – it’s just the nature of the beast. If you are good with your hands, you can save a lot of money on repair expenses.
Just like your car, your home will require regular maintenance in order to keep it running efficiently and to your tenants’ satisfaction. If your car broke down, who would you call? Would you want to wait a week before your car got fixed? Would it help if you had someone on-call to alleviate the situation right away? I’m pretty sure it would. It’s good to have a primary contractor/handyman on deck and a backup just in case. Two things happen when you have this setup. Your issues get resolved right away thus eliminating any opportunity for you to feel overwhelmed with stuff on your to do list AND it keeps your tenants happy with your service.
Keep your tenants happy and keep your rental income coming in. Simple.
This is why I decided to at least learn basic things like learning how to adjust the hot water regulator for a shower. I’m not talking about just turning up the heat, I’m talking about getting behind the shower wall, unscrewing some things, making some adjustments, and then putting things back together. I’m nowhere near the credentials of a plumber, but at least that was one less visit I had to call my contractor out for, thus saving more of our rental profit at the end of the month.
Things will pop up and it’s up to you to find the solution. Don’t cause stress to your tenants, this is somebody’s living situation, put yourself in their shoes. Since I’m pretty sure we will continue to go after properties that allow us to attract the highest rent possible, we find ourselves having a real estate investor mentality with an Air BNB operation model; highly service oriented.
5. Monthly Lease vs. Yearly lease
Ah, yes, the great debate. Should you go with a month to month lease or a yearly lease? Should you guarantee your rental income for a year or should you risk the chance of your tenants moving out early, leaving you with a vacant unit which equals no cash flow? There are pros and cons to each type of lease.
To be honest, I don’t think it’s worth having a yearly lease. At least for our property.
It would seem that having a yearly lease insures all of your rental income for 12 months and it does to a certain extent, however, I’ve seen majority of the nightmare stories about tenant evictions come from this type of lease.
Why?
A yearly lease insures a tenant can’t move during the duration of the lease agreement. Nowhere in the lease agreement does it say that your tenant will never become problematic.
If you have great tenants on a yearly lease then you have guaranteed your rental income for a year and now you won’t have to worry about finding new tenants. That can take a lot of pressure off you throughout the year. Could you imagine trying to find a new, great tenant during the winter?
If you screen your tenants properly, you won’t have to worry about problematic tenants, but if you were to find yourself handling an eviction, they are the bane of every landlord’s existence. Tenant evictions isn’t something that you can do by yourself. You have to rely on your city’s civil court system to move you through the process which can take months! On top of that, if your tenant ever decided to stop paying you rent during that time period, you can’t just kick them out. Especially when you have a family with kids as tenants. Nope! There are laws that protect the tenant from unlawful evictions (even if they were to stop paying rent).
I went after a month to month lease agreement for one reason and one reason only, protection against problematic tenants. You’ll have to understand that if an eviction or a vacant unit has the opportunity to financially destroy you, then you paid too MUCH for the property. God forbid, if for whatever reason, a tenant started showing signs of being problematic in the future, we can replace them in a timely manner, conserve our profit, eliminate stress, and save on court and attorney fees.
Vacancies will happen but I already prepared for that during my analysis before we pulled the trigger. In fact, this is one of the main reasons why this purchase was such a great deal. Even if we had a 5 month vacancy, we would still make money over the remaining course of the year. That’s also assuming no major repairs needed to happen other than regular maintenance.
I can speak from experience when I say I know how it feels when you’re renting, have a desire to move, but you’re stuck in a lease and can’t move until your lease expires.
It sucks.
As a landlord, I actually give my tenants that freedom with a month to month lease. Yes I’m risking having inconsistent profit if a tenant decided to up and leave, but to me, I’d rather pay that insurance and as a result, I’ll probably never have to worry about a problematic tenant overstaying their welcome. I can give 30 days’ notice and they would have to leave. I don’t even have to communicate why. When a month to month lease is initiated, both the tenant and landlord understand that at any point, the lease does not have to be renewed and either party can choose to cancel the lease.
Month to month provides me a quick fix for any problems that may occur with a tenant. It’s my hedge against risk.
I’m month to month all day baby!
All that to say…
It’s been an interesting journey to start. We’ve just started getting into our groove lately of how we want to run our business. It’s emotionally rewarding to be the captains of this ship as we continue to make business decisions that will help our rental property run as efficient as possible. Now that we have our mistakes behind us, with more to be made, this will help us continue to build our empire and portfolio of wealth for the future. We already know what to put into effect for our next purchase to run smoothly. As a reward to ourselves, if we accomplish our major goals with real estate investing, we’ll find ourselves moving to LA with majority of our living expenses covered on a monthly basis, and more.
Then again, I meant to say……. WHEN, not if, we accomplish our major goals.
It’s inevitable!
What was your experience with your first rental property? Comment below!