Tuesday, October 13

Lessons Learned From Managing Rental Properties

When I decided to become a landlord I didn't do too much homework. My first rental property was almost by accident. I wanted to move to a new house closer to my employer and I didn't want to wait for the townhouse I was in to sell, so I rented it instead.

Along the way I have learned some valuable lessons:
  • Avoid transaction costs. As I have moved from one house to the next, I have chosen to keep the old house and convert it to a rental. Why? First, I avoid the transaction costs involved with selling the house. Second, it disciplines me to save money for a down payment on the next home since I won't be receiving funds from selling a house. I plan to post more entries about "transactional costs" as they come up in many situations, not just buying a home.
  • Buy what you know. All my properties are in the metropolitan area where I grew up, and all but two of them are on the side of town where I was raised. I know this area and its past. It's like trading on inside-information. Besides that, if you plan to manage the properties yourself, you need to be close to them unless you don't mind driving across town at ten o'clock at night to fix a problem or pick up a late rent check. The two properties I own in a different part of town are managed by a third party so that I avoid having to make these trips.
  • Go with your Gut. As with many facets of my life, I like to keep things simple. Most landlords will disagree with what I am about to say: I don't charge a deposit, and I don't do a credit check on my tenants. Why? I would dread the inevitable confrontation that would come if I decided to withhold a deposit when a tenant vacates. Instead, I charge a bit more for the monthly rent. Where a landlord may charge $600 per month, I charge $625. I figure that by lowering the hurdles to rent I will place a tenant much faster and thus the increased rent I collect will justify any damage that a deposit would have covered. And by reducing the time a property is vacant, I make up for the lost rent I would experience from having a deadbeat tenant. I have had one eviction so far. The tenants paid me steadily for about 6 months. I lost out on two months rent, but the tenants left the home in move-in condition when they left. I know this won't always happen, but I figure if you treat your tenants right, they will take better care of your investment for the most part.
  • Live By the Golden Rule. I find this to be an important rule, particularly concerning the condition of the property . Simply put, I rehab each of my properties to where I wouldn't mind living in them myself. It makes the property easier to rent, and it cuts down on ongoing problems. I don't want to be called in the middle of the night with a maintenance issue, so I head off as many problems as I can by offering a property in pristine condition. For instance, I go with tile floors in the kitchen and baths and low maintenance carpet throughout the rest of the house. I have a plumber, electrician and HVAC technician give the home a thorough inspection before I ever show a property.
By following these rules, I've made my rental properties almost entirely "passive income". Sure, I have a couple tenants who I have to remind to pay the rent, but overall my time invested each month averages 2-3 hours.

2 comments:

  1. Wow, no deposit, that's gutsy. I've had my run-in with rentals too, I only have one now and currentlt rented to my daughter.

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  2. Is it gutsy? Most landlords charge the equivalent of one month's rent for deposit. Say the rent is $600 per month. That wouldn't cover much more than cleaning the carpets and fixing a couple of light fixtures. I guess it could be applied toward rent if the tenant tries to stiff me, but my theory is that I will earn more rent in the long run by occupying the unit faster.

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