As many of you know, I was an investor and landlord prior to my move to real estate sales. I have made lots of mistakes, thankfully most of them small, and I would love to keep you from making the same novice moves I did. I still have three of my rental properties (one condo and two houseboats) but I have to admit that the workload that comes with being a landlord has made me seriously consider if I want to add more rental properties.
1) You will not be 100% occupied 100% of the time. It is important when calculating rents that you factor in for at least one month of the year for the property to be vacant and bringing in zero income. Novice investors can be overly optimistic (I was) in thinking that the property they have to offer is so awesome that it will be occupied at all times. Truth is, it takes time to clean, repair, advertise, show potential tenants the space, screen tenants and get them moved in. Depending on the length of lease you plan to offer, you may want to plan for even longer vacancy periods. With my houseboats, I rent them in three month intervals, so I plan for at least 2 months per year vacant due to high turnover.
2) Mortgage Requirements. When buying an investment property, lenders often require more than 20% down and the interest rate is typically 1% – 2% higher than a standard 30 year fixed mortgage. This can have a big impact in your profitability. Cash flow and profit margins can be slim, especially in Seattle, so factoring for every dollar spent is key to making long term profits.
3) Things will break. And YOU have to fix them. Not only do you have to have a plan to keep funds on hand for major repairs, such as exterior painting, new roof and driveway repaving. You also get to be the one that gets the phone call at 2am to come fix the hot water heater that has burst and has flooded two units. You get to be the one paying the plumber to snake the toilet or put in a new garbage disposal or replace the washer and dryer that finally stopped working. These repairs can come all at once and it is important to have a long term maintenance plan as well as a good cash reserve (and a lot of patience) to deal with the more unexpected repairs.
4) The rental income the current owner states my be off. WAY OFF. When you are looking to purchase a rental property, most often, the current owner will tell you what rent each unit is bringing in. And 9 out of 10 times, they will be telling you it is “way under market”. Why on earth would a landlord have tenants that were paying below market rent? It may be that the owners are lazy or have given up, or it may be that they are grossly overestimating the actual rent they could get. Take some time to get on Craigslist, check out other similar rental properties in the area, and see what they are charging. If you have friends that are renters, ask them what they think the rent would be. No one knows the rental market better than a renter that is trying to find a new place to live.
5) What kind of tenants do you want? Unless you hire a property management firm (that cuts into your profits!) you will be the one dealing with your tenants. Do you really want the rooming house near the University where you will be dealing with an endless stream of 19 year old college students? Do you want to deal with the person paying $4,500 a month for a luxury condo? Do you want to have the tech crowd from Amazon knocking down your door to rent your place? When choosing your investment property, think about the type of people that will want to (and can afford to) live there.
Buying, owning and operating investment properties can be a lot of fun and help build long term wealth. There is nothing more satisfying than having someone else pay your mortgage, until you get that call at 2am…
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