Make Managing Rentals EASY!
scottsent July 30th, 2008
Take The Hassle Out Of Being An
Investor!
Most people get into real estate investing for one reason only - TO MAKE MONEY!
Some benefits of buying real estate properties are:
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Buy low so rents cover your costs, then sell high.
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This keeps your out of pocket costs low while allowing you to profit when the market rebounds
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Plan long term - for retirement funds
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Tenants pay off your mortgage so you own property free and clear after 30 years.
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Flip Properties (this strategy isn’t recommended)
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Repair delapidated properties for resale (sweat equity) - appealing to contractors
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Build personal wealth
While the U.S. government classifies real estate rentals as a ‘passive’ activity, talk to any seasoned landlord and they will tell you there is nothing passive about it.
Things you can expect to deal with when being a landlord include:
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Vacancies - eat up your capital reserves!
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Deadbeat tenants - not only don’t they pay but you have to spend money to evict them!
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Tenant damage to the property - Take any new home and rent it out, in a few years you may have thousands of dollars of repairs (kicked in doors, holes punched in the wall, neglect)
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Unpermitted tenant additions or modifications to the property, including hazardous electrical wiring
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Drug dealing in the property - brings a bad element reducing property values
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Methamphetamine production (which effectively destroys the home)
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Animals bought after the tenant signed the lease (use your imagination)
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Bad housing market means you cannot sell at a profit, or have to sell at a loss
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etc…
So, the point I am trying to make is buying and owning investment real estate is going to be significantly more involved than other kinds of investments.
Some people are used to investing in Stocks & Bonds, which are fairly liquid investments (you can pull cash out immediately). Housing is completely different, requires active involvement from the investor, and must be re-sold when the market is ripe, not necessarily when the investor needs to sell.
You’re probably thinking ‘ok Scott, so are you trying to get me to forget all about real estate investing?’
Not exactly - what I am trying to do is get you to start thinking like a landlord well before you become one! Getting you up to speed on the ins and outs of owning investment properties is going to really help you in the long run.
Here’s a few things you can do to prepare yourself:
- Buy a few books by well know authorities on the subject of being a landlord
- Make sure those books include the following topics:
- How to qualify prospective tenants, including background checks
- Tenant deposits, walk throughs, & your rights to the deposit.
- Lease contracts, disclosures, and other legal forms
- Your duties as a landlord
- How to make sure your property is not being damaged and the tenant is abiding by the lease terms
- How to maintain your property
- Legal information on how to navigate the law and deal with unsavory tenants
- Your legal rights as a landlord
- Buy yourself a good software - like Quicken rental property manager
- Learn how to setup the software, use it and prepare reports
- Use practice company that comes with the software
- Train yourself to use the software daily
- Use reports to seek out opportunities to reduce waste and increase profits
- Constantly evaluate rents
- Go to www.rent.com every 3-6 months
- Allow for a cost of living increase annually
- Set reminders using Outlook or Quicken to re-evaluate rents
- Provide a financial incentive to retain good, long term tenants
- If your lease rates are slightly less than the going rate, long term tenants are more inclined to stick around
- This is a good strategy for reducing vacancies
- Keep an eye on overall vacancy rates as compared to industry standards.
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- If home prices are cheap, then rental properties will suffer
- If home prices rise, rents can go up and tenancy rates will improve
- If neither of these two factors is present, and your vacancies are still high, consider the area
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- Sell poorly performing properties
- If vacancies are high compared to your other properties, consider all factors and make an executive decision to dump the property
- Use 1031 exchanges wisely, to minimize capital gains and defer to a later date
- Have a 1031 exchange firm in your back pocket, just in case
- Have dependable contractors lined up to do the work timely at a fair price
- Plumber
- Electrician
- Handyman
- Appliance repairs tech
- Roofer
- Cleaning company - for vacancies
- Carpet Cleaner
- Painter (inside & out)
- Real Estate Broker
- Mortgage Broker
- Property management company (if you decide it’s not worth your time and it’s more cost effective to farm out this work)
- ***Don’t rely too heavily on any one contractor
- Maintain significant capital reserves
- This will help you weather any market related storms resulting in high vacancies
- Don’t over-extend yourself
- Buy properties using as little cash down as possible - leverage your investments
- Don’t refinance investment properties unless you’re sure the rents will cover it
- Keep your property in compliance with all applicable laws
- Don’t have bills sent to investment properties - don’t rely on your tenants to pay bills you are liable for!
I could go on and on about these things, but I think you get the picture. There’s alot more involved in owning investment properties than meets the eye. Likewise, over-extending yourself is risky business.
Real estate investing requires a long term strategy, capital reserves, and the ability to weather a few storms. It’s also rather involved so if you don’t have the stomach for managing your own properties, find someone who can and understand they will charge a premium for the service.
Being a landlord is effectively being in business for yourself. Treat it with the respect and attention of a business.
Truly understanding your costs, planning for a % of vacancies, repairs, maintainence, etc is going to be the best way to succeed as a Real Estate Investor.
- Property Management & Real Estate Investing
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