The 9 Most Important Lessons I Learned About Money When I Became a Landlord

Written by Apartment Management Magazine on . Posted in Blog

Real estate financeWith 30 years under my toolbelt as a landlord, I’ve had my share of lessons learned — so I thought it was about time I put some of those learnings down on paper. Previously, I’ve written about key considerations when shopping for a rental property. Here, I focus on money lessons learned after closing the deal and actually managing the property.

The real estate properties that form the basis of my experiences are a two-family property my wife and I have owned and managed for 30 years, and a rental condo we managed for 20 years then sold. Now on to those lessons…

1. Learn to Be Handy

Owning rental properties is all about building “sweat equity.” The less you pay others to do maintenance and make repairs, the more you keep for yourself. But when you make the repairs, do buy items of higher quality that will last longer. Having to return over and over to make the same repair gets old quickly and winds up costing you more in the end.

2. Be Respectful and Responsible

Remember that both landlord and tenant have responsibilities. I try to put my best foot forward with a new tenant by making sure the unit is in excellent move-in condition, and by responding promptly when they reach out to me. More often than not, they return the favor by taking better care of the property. In other words, “What goes around comes around.”

3. Get a Good Lease (From a Lawyer)

Your lease is a legally binding contract. Make sure you read, understand, and agree to every word. Who is responsible for lawn care? Who shovels the snow? Does it require tenants to be responsible for small repairs (say, under $20) and basic maintenance such as replacement of light bulbs? How much notice do tenants need to give you that they are leaving? (I suggest at least one month.)

Consider the lease a flexible document that can be improved over time to address lessons learned. For example, we’ve found a month-to-month lease works better for us than an annual term, because it provides more flexibility for tenant changes.

4. No Pets! No Exceptions

It took a double-whammy for us to learn this lesson. The downstairs unit of our two-family has very nice Andersen casement windows with stained wooden sills. The upstairs has wall-to-wall carpeting to cushion sounds between the floors. Our very first choice of tenants to occupy the downstairs unit had two cats. Even today, if I close my eyes, I can clearly see images of the deep gouges in those (previously) beautiful sills, and the rips in the Anderson screens.

Upstairs, the culprit was a dog. He used the carpeting as an opportunity to mark his territory — and he did a thorough job, extending into the hardwood flooring underneath. After spending thousands of dollars to repair the windows, replace the carpets, and sand and refinish the wood flooring, it has now become very easy to answer the question we’ve since been asked many times: “Do you allow pets?” Without hesitation, the answer is always the same: “NO!” I take pride in even sticking to my guns when a recent prospect offered to add $300 per month to the rent if we allowed him to keep a pet piglet.

5. Check Tenant References — And Their Car

Banks and other lenders often use the “5 C’s of Credit” to determine whether or not a borrower qualifies for a loan. One of those “C’s” is Character. You want to rent to someone of strong character, who is responsible and honest. So ask for and check both employer and personal references. Do Google, Facebook, and LinkedIn searches while you’re at it. Look for other clues, as well. For example, when meeting a prospective tenant, I always look at their car to see how clean they keep it on the outside, and how cluttered it is on the inside. Unlike a banker, you’re not just lending money; you’re lending someone your house.

6. Check Tenant Finances: Trust but Verify!

Another of the “5 C’s” is “Capacity.” Capacity answers the question, “Do they have enough income to afford the rent?” As a general rule of thumb, your rent plus utilities should be no more than 30% of your gross monthly income. Ask for their most recent pay stub, and call their employer to verify their employment. It’s human nature to want to trust other people, but in this case you need to back it up by verifying.

7. Wait for the Right Tenant

This one falls under the “Pay me now or pay me later” category. I do admit, it’s easy to yield to the taunts of the devil on one shoulder (“Live for the moment and take the money now!”) rather than heeding advice from the angel on the other shoulder (“Wait for a better candidate!”). Trust me, it’s much more costly — not just financially, but also in time and aggravation — to remove a bad tenant than to forego one or two months’ rent in order to find a good one. Do yourself a favor and take the advice of your better angels.

8. Get an Umbrella Insurance Policy

Being a landlord elevates your risk of being sued. It only takes one lawsuit — perhaps involving a tenant falling down stairs or slipping on driveway ice — and you could face hundreds of thousands of dollars in damages. So take out a general liability, or umbrella, insurance policy. Don’t risk getting wiped out. Paying $50 per month for umbrella insurance is a small price in exchange for sleeping soundly at night.

9. Take an Honest Look in the Mirror

Do you have the people skills to deal constructively with tenants? Are you willing to be on call 24/7 to respond to complaints big and small, or to drop everything for the repair of a furnace, toilet, or hot water heater? At times these things are a true test of patience and perseverance.

Self-awareness is key. If you have a spouse or partner, and if the demands of property management begin to weigh more and more heavily on either or both or you over time, it could drive a wedge in your relationship. No amount of rental income is worth that price.

So, taken as a whole, has our experience been worth the effort? Yes. The two-family has worked out better, and we still have it. It generates a regular monthly stream of positive cash flow (over $1,000 per month after all expenses). Granted, it requires time and attention (isn’t everything in life a tradeoff?), but in return we’ve received the equivalent of a modest monthly pension payment since our early 40s. Not many other investments can do that.

Do you own rental property? Any of these lessons sound familiar? And if you rent, how’s it look from the other side?

Source: wisebread.com

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