So you Wanna be a Landlord?
Hi there BP!
the following is something I feel needs to be written to kind of get a lot of things on the table. First off, a couple of disclosures:
1) I am NOT a millionaire in real estate. I'm just a hard-working dude with a small-to-midsize-ish portfolio that has had a lot of experience around the business, and wanted to share. That being said, it is growing.
2) Some of the things you might read here are a) not PC b) might offend you and c) might cause you to take a 2nd look at what you are doing. I also have a bit of a potty-mouth. You've been warned.
3) I work full-time at a real estate investment firm, am NOT a licensed realtor, don't really care to be one, and spend a lot of time dealing with unreasonable people. I also have very limited tolerance for "sweating the small s**t"
4) your activities here on BP, as well as your REI are completely voluntary. That includes reading this post... ;)
Now that we have that out of the way, I can tell you that I actually really, really enjoy the landlording business, but it took me some time to get there. Its been up/down/sideways and whatever else you can think of, but at this point, while I have not reached Zen, I'm getting there. Why am I writing this? Easy - this place helped me a lot, and I'm giving back. Its been a god-awful couple months for me personally full of heartache and loss, and I need some positive vibrations in my life.
First off - Landlording, if done incorrectly, or cheaply, or any one of 354,622 ways that it can be done wrong, is going to be a gigantic pain in your ***. It will also be a pain in the *** to your family, your dog/cat/weasel/horse, your spouse, your co-workers, and your wallet, as well as possibly contributing to my early onset case of male pattern baldness. Lesson learned.
However, with some thought, some know how, some support from your friends on BP and the use of more than 15% of your brain, its a lovely way to make a living.
In a nutshell, you are deciding to get in business for yourself, using some basic leverage, and attempting to better your life. Mazel-Tov! That being said, where people tend to run into trouble (myself included) is when their business plan wouldn't hold up to a wet slap from a tired 5 year old.
Your rentals are a PRODUCT that you introduce to a MARKET and need to SELL them. This sounds simple but its not. We all bring some kind of unique skill to this business, and YOU have to decide what YOURS is. I was fortunate enough to learn a LOT about construction, and then TAUGHT myself a lot about finance, and I still screw it up sometimes. Such is life.
The bricks, sticks, wires, pipes and machines WILL BREAK. If you take the usual moronic approach of buying the cheapest mass-produced imported garbage from your local Big Box, and then slapping it together, and think it will last, then you WILL spend a lot of nights/weekends fixing that same garbage. Your tenants WILL tear stuff up. They WILL try every last stupid trick in the book to get one over on you, pay late, get something for nothing. Plan on it, or you will lose sleep.
If you want to own something that will pay you for 20-30 years, act like it. The professionals in this business know maintenance about as well as Warren Buffet makes money, or Jenna Jameson does what she does........listen - you're going to have problems as a landlord. Just decide what kind of problems you want to have, and take it from there!
In other words, your mindset on this starting out will greatly affect how it goes for you. If you think you can buy a jalopy car and get into trucking....well....give it a try and let me know how it goes.
THE BASICS:
- Sales - this is easy. Think about it - all of humanity wants a nice place to live. This was the reason we first got into caves from trees, made fire, wore skins of animals, and fought wars. How is this practical? Use what knowledge you have to provide a better product at a price that is competitive, in a market where demand out-strips supply. Make sense? If you live in a small town like where I grew up, and every rental is a beige, roach-infested glory hole, then make yours nicer! Duh. If you live in a city like where I do now, make your rental look better than the 35,000 other basic boxes run by DGAF staff, and guess what? You will have basically zero vacancy and TONS of qualified applicants! Say Whaaaaaat?
An ancillary benefit of this is that when you have a nicer product than the competition, your customers (tenants..catching on yet?) will COMPETE for your product and once they have it will WANT to stay, and take care of it. It also makes increasing the rent stupidly easy. Hell, I've been offered rent increases by tenants!
- Maintenance - Dude. $h*t breaks. Deal with it. The general rule of thumb is this - if it might break, its going to break. The logical second step to this is that when $h*t breaks, its going to annoy you. Especially if you aren't planning on it. Here in the desert, AC units only break at 8pm on Friday when I'm out to eat with the wonderful woman I am lucky to share my life with, and its 110 degrees. While I don't have personal experience, I'd guess the same goes for heaters in cold places when its 30 below. Now, call me crazy, but I would rather spend a little more money, in a predictable and responsible manner, than have stupid maintenance calls. On the rare occasion when I find myself in one of those blue or orange hellscapes known as "Big Box Stores" and I see some newbie trying to fix a drain with cheap imported goods made with child labor, my soul dies a little inside. Get to know your professional suppliers with higher-quality, preferably DOMESTICALLY MADE goods, and know that yes, you are going to spend a little more, and you are going to have less $h*t break. Planned expenses are like anything else - better the devil you know than the devil you don't.
- Property Management - Ok, in case you haven't gotten the memo, it is 2017, and we landed MEN on the MOON before I was born. If you are still waiting for checks in the mail.....well, good luck. I've traveled a LOT of this country, and a parts of many others, and if a dude in rural Guatemala has a smart phone, then you have no excuse for not running your business with technology, leveraging it to your advantage, and taking yourself out of the equation as a barrier. Collect rent online or not at all, use some kind of background/credit service, require auto-pay, and hey, guess what? If you truly have a nice spot to live, and people want to live there (remember the sales thing?), no one will give a rat's hindquarter about doing any of those things, and you can just go relax! How cool is that? Another nice benefit of this is that if your tenants feel like they are getting a good deal, and you haven't made the mistake of renting to a pile of muppets, they are far less likely (but not immune to) pulling moves. When they do pull a move (not IF, WHEN), there is 1 rule for it - no mercy. Well, another rule is that judges tend to like people who are really organized. So 2 rules.
- Location - this one is big. As in a mission critical item. I personally dislike the following: cold climates, annoyingly tenant-friendly laws, long eviction periods, onerous city governments, shrinking populations, and generally anything over a 20 minute drive from my house. Yeah, I get it, you are different, and your life is a beautiful and unique snowflake. (actually, news flash - its not, but thats another post). So, this one is up to you, there is enough info on this forum to keep a meth-head busy for 9 weeks on that topic. So have a couple espressos and go nuts. However, this part will affect your sales.
- Money - you will need it. I personally think anyone who doesn't put down 10% or more is gambling, but you probably think I'm an idiot, doubly so if you are still reading this...Jeez. Practically speaking, here is how that goes: cash buyers will kick your a$$ on most deals, so be prepared, properties cash-flow better with 25% down, either spend it upfront in repairs/upgrades (good ones, not crap) or be prepared to bleed it out on maintenance, and (this one is important) if your property maintenance schedule/budget (you don't have one? you're an idiot!!) would put a 7 year old full of skittles to sleep, then you're doing it right. Learn IRR, learn CoC, learn what CapEx and R&M budgets are. Remember, you're a professional, so act like it. Do you think the rich guys got there by just guessing? If you do think that, well, I've got some arizona oceanfront I'll sell you for one hell of a bargain. PM for details.
- Tenants - they are your customers. Keep them happy, be firm but fair, and don't be a patsy or they will flat run your *** over. Allow dogs and cats if you want, but charge lots of money for them, and never forget that YOU are in charge. People tend to want to do business with people they like. Nothing gets someone's attention like smacking them in the wallet. Implement what I call a "Zero Bull$h*t Tolerance", and tell people that upfront in the nicest way possible. If you get a bad vibe, run like hell. Responsible pet owners will gladly pay much more money for a nice place to live. Credit Scores aren't everything, but higher FICO's mean they have more to lose. Get better at negotiation. Work out more, I got a lot less flak from everyone once I hit 190lbs of piss and vinegar. Lets me be nicer too!
- Bankers - Mark Twain said it best - they are the type that will loan you an umbrella and ask for it back the second it starts to rain. Plan accordingly. They never get things done on time, its always delayed, and always costs more than expected. Don't get annoyed by it, adjust your expectations. Yes, you need to have money, liquidity, good credit, and savings. Why? Because when a lot of amateurs got into this game without a plan, they about ended the world as we know it. (Ok fine, some cocaine-addled lunatic smart guys and a mountain of derivative debt helped, but still). Again, remember the professional thing? You want to be treated like an adult? Me too, but keep in mind that money is a powerful tool, and no one wants to hand a 5 year old something that he can hurt himself with.....sodas obviously notwithstanding.
Anyway, I'll shut up for now, as the espresso is wearing off, and life beckons. Comments, good and bad are welcome, but please don't ask me silly micro-managed questions, keeping the 30,000 foot view of this game is critical, and a skill that needs to be cultivated.
Happy Landlording!