6 things I learned in my first year as a landlord that any new real estate investor should know
- I have several rental properties, and in my first year as a landlord, I learned a few lessons that could have saved me money if I'd known.
- I wish I'd known the inspector won't find everything — a missed electrical issue cost us several hundred dollars in the first month.
- Also, it's important to have good contractors lined up for when you need them, and to keep good tenants.
- And never do repairs or replacements cheaply because it's "just a rental" — it'll cost you.
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Buying a house is always a little thrilling, and even more so when that house is (hopefully) going to put a little cash in your pocket. With the purchase of your first rental property, you're not just a homeowner, you're an entrepreneur.
But before you start envisioning yourself as a future real estate mogul, know that there's a lot to learn and that you are probably going to learn it the hard way. Like I did.
Houses — and tenants — require tending; there's no such thing as a rental property that runs itself. As a landlord, you'll not only be managing a building, but the people who live there. Think of your property as a company and yourself as its only employee. You're not just the CEO, you're also in charge of human resources, finance, marketing, and operations. And just like any skilled entrepreneur, your goal should be to manage your "company" in a way that adds value to it. After all, you're not going to own it forever.
Here are six things I learned when I first became a landlord. Take them to heart, and you'll save yourself a lot of headaches!
The inspector won't find everything
"Contingent upon inspection" is a familiar term to anyone purchasing property. You pay the inspector to examine your prospective purchase with an eagle eye, looking for problems, both big and small, that are likely to cause you pain and cost you money. Once that's done, you can be pretty sure you know what you're in for, right? Wrong.
We were in a hurry to close on our property, so we chose the inspector who happened to be available, rather than waiting for the better choice. Our guy missed a pretty significant electrical issue in one of the apartments, which ended up costing us several hundred dollars almost immediately after closing. Also, he probably should have given us a heads up that the ancient and enormous water heater would soon need replacing.
Lesson: Do your own homework, ask lots of questions, and don't let impatience get the better of you. A good, thoughtful inspection will save you a ton of time and money in the long run.
It's extremely helpful to have a good relationship with the previous owner
This isn't always possible, of course, but a former owner is a great source of information on your property. When was the roof last replaced? How was that foundation repair made? What company did you use for garbage pickup?
We were lucky that the former owners of our rental were great people who didn't seem to mind hearing from us now and then, giving us a bit of advice, and passing along the names of contractors they had worked with and who would have some memory of the repairs and improvements that had been done.
If you feel uncomfortable with this kind of relationship, do yourself a favor and at least get a list of the names and numbers of trusted contractors used by the previous owners. Which brings us to number three.
Have your contractors lined up
Plumber, electrician, carpenter, HVAC specialist, general handyman — unless you are extremely handy (we're not), you're probably going to need them all at some point. And it's incredibly important to know who to call before you're in dire straits.
When the basement in our rental property flooded, we immediately called the general contractor who had done other work for us and he came instantly and made plans to install a sump pump. And that same contractor introduced us to a plumber who would come to our rescue when our pipes froze. The best sources of contractor recommendations are the previous owner and friends and neighbors. But I've also received great advice on local Facebook groups and at local hardware stores.
It's good to keep existing tenants if you can
When we bought our property, the realtor told us that the existing tenants each had stellar histories of on-time rent payments and were pleasant to deal with. That's music to a landlord's ears. The previous owner genuinely seemed to care about his tenants and their well-being, and we very much wanted a similar relationship.
We pledged to keep both tenants and to keep their rent stable for at least a year (this promise actually helped us acquire the property, as there were other interested buyers). Yes, that's a nice thing to do, but it's also very practical. Existing tenants have historical knowledge of the property that you lack as a new owner — knowledge that you'll find useful.
Don't do repairs or replacements cheaply because 'it's just a rental'
Ugh, I learn this one over and over again! A couple of months ago, I bought a new bathroom faucet at a big-box retailer and arranged to meet a plumber at the house. After an hour, he declared that the faucet was defective. So I did what I should have done in the first place: I drove to the next town over and bought a quality faucet from a higher-end showroom.
Of course, I had to pay the plumber for two installations instead of one. If I had bought the better faucet to begin with, I would have spent less. So, buy better fixtures, don't go super cheap on appliances, and hire licensed contractors. (Sure, your cousin Joe says he'd be happy to do that rewiring for you but, no. Just no.) Lesson: There's nothing more expensive than a cheap repair.
Be proactive with improvements
Most of your nasty surprises will probably hit you within the first year of ownership. And frankly, this is when you're most likely to want to tear your hair out. Trust me, you'll get a break. But when you do reach the holy grail of positive cash flow, believe me this is not time to sit back and watch your bank account grow. It's time to be proactive.
Do you need new windows, a fresh coat of exterior paint, landscaping, a new hot water heater or furnace? Take care of these things before they become problems and you will not only save yourself a lot of stress, but you'll send a message to your tenants that you're on top of things and interested in keeping them safe and comfortable.
Bottom line: If you've had a good year financially, you can either pay the IRS on those profits, or reinvest them in your property. We always choose the latter.
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