It’s official. The first rent check just hit my bank account.
I’m now a landlord.
This wasn’t my plan. I bought a new house a few months ago, and I wanted to sell my old house to bolster our down payment. But I wasn’t getting the offers I wanted after missing the peak selling months last summer.
So, rather than sell, I held on to the house to rent it.
I’m glad I did. My portfolio is heavy in financial assets and light in real assets. Adding a real estate rental property to the mix gave me some exposure that I’d been lacking.
I also happened to have cash on hand for the new down payment, so it wasn’t critical that I sell the old house. My new mortgage is a little bigger than I had planned, but it’s still well within my family’s means.
After paying all expenses on the house, including the mortgage, I’m netting just under $1,000 per month for my real estate rental, which I plan to use to accelerate paying down the mortgage.
I’m not recommending you run out and buy a rental house. That might not make sense for you. But if you are thinking about becoming a landlord, let me share a few pointers.
Real Estate Rental Tips
There Will ALWAYS Be Expenses
I lived in my old house for 11 years. My three children contributed their share of wear and tear on the poor thing. I fixed most of the damage along the way, but there were certain things I just opted to live with.
Well, tenants won’t live with issues, particularly if rent is higher. I had to drop several thousand dollars on minor cosmetic repairs, and this was after I dropped $20,000 into bathroom remodeling.
I factored expenses into my budget. But repair costs are still a shock.
This is where that all-important margin of safety comes in. If your margins are razor-thin and you don’t have a cash cushion, expenses — even modest ones — can eat you alive. You can go broke trying to earn a profit.
Time Is Money
I hired a property manager for my rental. This was a no-brainer. I have a demanding job and an even more demanding family. Plus, I spend months at a time outside of the country. (I’m writing this from Playa del Sol, Peru, for crying out loud.) The idea of collecting rent and haggling over repair costs to fix a clogged toilet from another hemisphere was a nonstarter.
I pay the property manager a flat rate of less than $200 per month, and they handle everything, including vetting and credit checking prospective tenants.
I’ve never had to speak to the tenant. I don’t even know their name.
It’s better this way. I don’t need more stress in my life.
Your situation might have different details, but I’m betting that it’s not too different. You don’t want or need the stress of dealing with the day-to-day issues of management.
If you can’t afford a property manager given the property’s cash flows, reconsider doing the deal.
You Have to Watch the Watcher With Real Estate Rentals
That said, I don’t recommend a totally hands-off approach. At the end of the day, you’re going to care more about your property than a hired gun will. I let the property manager deal with the day-to-day details, but I plan to drive by the house every month or two … just to make sure nothing is amiss.
I also review the expense statement to ensure the manager isn’t gouging me with expenses. I trust them. But, again, it’s not their house, and it’s not their money. They don’t have the same incentive I do to control costs.
Nothing Ever Quite Goes as Planned
I went into this assuming I’d have the house rented by Thanksgiving.
That didn’t happen. We’re now in February, and I’m just now getting the first rent check. I’ve been on the hook for two mortgages this whole time.
That wasn’t fun. It’s money flying out of my pocket that I’d love to spend on anything else.
I’m not expecting any issues, but if my tenant runs into financial problems and stops paying the rent, I would again be on the hook for the mortgage until they’re evicted.
So again, it’s all about your margin of safety. Before you go into something like this, be sure that you’re in a position to service the loan for several months if things don’t go as planned. If it’s tight, walk away from the deal.
Bottom line: I like real estate, and I believe it makes sense to have a rental property in a diversified portfolio. These real estate rental tips should help you figure out if adding this asset makes sense for you.
To safe profits,
Charles Sizemore
Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.