I mentioned a couple of weeks ago that entering the rental property biz has been one of my top 5 financial moves. The next few Thursdays will be devoted to becoming a landlord with pizazz – because who wants to be a boring landlord? I’ll discuss all kinds of advice from getting started (this post) to finishing up (handing the keys over to a fantastic tenant and keeping them happy) as well as everything in between (management companies, finding a realtor, lawn care, etc.) Lets get started!
Save for it
You are going to need a substantial down payment to purchase a rental property so becoming a landlord tomorrow probably isn’t going to happen. Start setting aside money every month in order to garner a nest egg. This is crucial. You’ll need 20% down as lenders won’t give an investment loan to you with less skin in the game. That is a HUGE chunk of change. However, there are ways to get into the rental game with much less cash on hand as I’ll tell you about next week. I’m sure you are salivating already!
If you are looking at multi-family housing you’ll need even more cash for a down payment – more like 25-30%. There are pros and cons to multi-family housing. One of the cons is obviously the barrier to entry that the higher down payment dictates. I’ll give you a full list of the benefits and hindrances of multi-family housing in my third post, only two weeks away. I’m such a tease.
Know the neighborhood
You’ll want to know the typical prices and sales of homes in your neighborhood before you start throwing offers around. Follow those numbers closely on websites like Zillow, Redfin, or Trulia before you pounce. If you really want to become a landlord you will be incredibly familiar with the prices and you’ll KNOW when a deal hits the market. I suggest a minimum of three months of following the market in your hood before you jump in.
In many neighborhoods home prices can change street to street. Make sure you know your neighborhood down to the specific block. For instance, my wife Em and I live really close to the oldest park in our city. Everyone wants to live in the victorian mansions that sit right on the park outskirts peering out at the ancient trees. If you are too far away from the park your home just isn’t as desirable, and being just 5 blocks away could mean your home is worth HALF of what one on the park would bring. Knowing how close you need to be and how much home prices vary from factors like that is crucial. That location, location, location thing has its merits.
Is it right for your lifestyle?
Honestly assessing where you are in life and if this works for you is important. You don’t want to get overly excited (as I’m prone to) and launch into something you aren’t really ready for (done that before). You need to ask questions like:
-Am I ready for this?
-Do I have the time in my life to make this happen?
-Is this good for my family right now?
-Am I putting all my eggs in one basket?
Don’t be caught trying to get in on a good thing without the margin in your life to really be able to commit to it. You’ll end up resenting the unnecessary strain in your life and landlordship will take its toll on you quickly. This is only right for you if you have the capacity for it.
I hope the prep work tips are helpful as you are starting to navigate the landlord waters. Becoming a landlord has some wonderful perks with some definite potential pitfalls. Next week I’ll talk about strategies for getting into the rental property game without a giant down payment. Same bat time, same bat place.
Anyone ready to start prepping yet?
Great post! We are deciding about whether or not we want to rent out our current house.
Thanks Michelle. We had that same dilemma last year. I’ll detail that next week.
Think LONG and HARD before becoming a landlord. I bought two duplexes. Finally sold one last month. Hope to sell the second this year. Both at a big loss. But I’m happy because I won’t have to deal with lying tenants anymore. One of the biggest mistakes of my life. I was under the misconception that most tenants had at least an ounce of respect for someone else’s property. And I am by no means a slumlord. I maintained the properties well and treated my tenants with respect. The only way to do it, in my opinion, is to have enough units to afford a good management company. Otherwise, it is a lot of major headaches.
Hey Bob,
I’m sorry you had such an issue with your rental properties. Some soul searching is definitely in order if you are contemplating purchasing a rental property. It isn’t easy, but for many, it can be worthwhile.
Being a landlord is not for the faint at heart. Our first experience with renters was horrid. They destroyed our beautiful house and then skipped town. We are out almost 9k in repairs. We’ve had to pay that mortgage too since no renter is in there while it’s getting fixed.
What a nightmare!
Elizabeth,
I’m so sorry that being a landlord hasn’t worked out well for you. There are some definite risks involved and it is such a bummer that you got such a terrible tenant. I hope that you find some good people to inhabit your home in the future. You are right, it really isn’t for the faint of heart.
as a landlord and a business person i also wanted to add a comment about cash flow management and the impact of a non paying tenant. Many landlords believe that a non paying tenant can be removed from a property quickly and replaced quite easily.
Please consider that some states have a process that can see a non paying tenant continue residency for several months while the process goes through the courts. Once they are evicted by the time the property is cleaned, advertised and re let it can easily be a six month process.
As a landlord make sure you are prepared by having a fund in case this occurs, alternatively buy rent default insurance. The premium on a property that rents for $ 1,100 a month is $ 250 a year so pretty inexpensive. It also covers legal fees.
Also rememeber that legal fees are a big issue, and if you think the chances are low ask one of the 2.2M landlords that file court actions for non payment of rent each year in the USA
Thanks PA. Great stuff to consider.