Rental properties can provide a reliable income stream and long-term investment for some landlords, but others find it stressful dealing with disrespectful or late-paying tenants. And lease violations, for example where tenants illegally sublet their space on Airbnb, add another potential headache. Even diligent landlords may not come out ahead financially if maintenance, legal costs or vacancies outstrip what they can collect in rent.
[See: 8 Strategies for Investing in Real Estate.]
” Rental real estate isn’t nearly as passive as many make it out to be, especially single-family homes,” says Joseph Hogue, a landlord, chartered financial analyst and founder of MyStockMarketBasics.com. “It’s not quite as easy as buying a lot of properties really quickly,” he says. There’s a lot more to being a landlord than simply cashing rent checks. With that in mind, U.S. News talked to several landlords about what they wish they’d known before investing in a rental property.
Don’t rush into buying a rental property. Earlier this year, Gwen Mertz bought a multifamily home in Iowa. She lives in one unit and the rent from tenants in the other two units covers her mortgage, along with extra cash flow. That may sound like an ideal living situation, but she admits that she may have been hasty in purchasing after only looking at two properties. “I wish I would have slowed down and taken my time,” she says.
Mertz is a first-time homebuyer, so dealing with the complexities of owning a home and dealing with tenants has been tricky, she explains. One of her tenants has been great, but the other blasts loud music, delays rent payments and even once invited guests who punched holes in the dry wall. Fortunately, the tenant left on his own volition, but Mertz wishes she’d learned more about landlord-tenant law and the eviction process before buying. “There’s a complicated web of laws and rules surrounding being a landlord. I still don’t know all of them,” she says. While the legal implications vary by state, the eviction process is rarely an easy or swift process for landlords. In Iowa, for instance, landlords must give tenants seven days’ notice of their lease violation before the landlord can file a petition for eviction with the district order.
Budget for vacancies. Anytime you have an empty rental, whether it’s due to an eviction or the end of a tenant’s lease, you’re incurring all of that unit’s carry costs rather than collecting rent to offset a mortgage, property taxes and other expenses. Vacancies can cost you not just money, but also time.
Hogue estimates that if you have five rental properties, you may have one unit vacant about every two months on average. And if you don’t hire professionals to clean or make repairs in between tenants, that labor falls on you. “You [could be] looking at painting, changing carpets or at least washing carpets [and disposing of] maybe almost a dumpster full of trash,” he adds. Calculate the cost of vacancies and the time needed to turn over rental units before you jump in.
[Read: When Does It Pay to Rent, Even When the Numbers Say It’s Cheaper to Buy?]
Define the role of your property manager. Some landlords manage their own rental properties, while others use a professional property manager, especially if they’re not in the same geographic area as their rental. Eric Marcus, owner of Eric Marcus Real Estate Group in Chicago, owns three rental units and wishes he’d set expectations early on with his property manager.
Marcus’ property manager collected rent from tenants and then paid him. He assumed that if a tenant didn’t pay rent, the manager would notify him, but that didn’t happen. “We had a tenant that didn’t pay and I didn’t realize it for about six weeks when I happened to look at the bank statement,” he says. Once he talked to the property manager, she gave the tenant seven days’ notice to pay his rent or move out as required by law, and then he followed up with the property manager about communication expectations in the event a future tenant did not pay rent on time.
Hogue adds that property management companies generally want to work with landlords who have a portfolio of several rental units, so it may be cost-prohibitive for the owner of one or two rental units to hire one.
Set clear expectations with tenants. Your lease agreement should spell out what maintenance issues are the tenants’ responsibility, especially if it’s a single-family home with a yard. “[Tenants are] basically responsible for the house like it’s their own house,” Marcus says of his agreement. This includes landscaping, trimming trees and changing air filters regularly. If you don’t spell this out, you may wind up paying for deferred maintenance or fighting with tenants.
Marcus has also learned to establish standards about future rental increases, so tenants know what to expect if they plan to renew their lease. “I would put in a provision upfront about rental increases and not wait until the end of the lease,” he says. He tells tenants in advance how much their rent will increase the following year if they choose to renew their lease. Setting future rent increases in advance can help your tenants avoid surprises, but it also means that if the rental market greatly appreciates, you may not be able to capitalize on that growth.
Look at in-demand neighborhoods. According to Hogue, buying rentals in less desirable neighborhoods is a rookie mistake. “I reasoned I could buy a house for nearly half the price and still collect strong rents in riskier neighborhoods,” he says. “It seems like a no-brainer when you only look at the rent return, but the realities of tenants and neighborhood problems make it far less profitable.”
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In several of these properties, multiple tenants had to be evicted, which drove higher tenant turnover and maintenance costs. Though it means a higher purchase price, buying in a better maintained neighborhood tends to attract more stable tenants willing to pay higher rents.
Hogue suggests only buying rental properties where you’d like to live. If circumstances change and you can’t find new tenants, you may have to live there someday, he adds.
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5 Things Homeowners Wish They’d Known Before Becoming Landlords originally appeared on usnews.com
