Considering becoming a landlord?
Don’ jump in blind.
Here is my list of 10 things everybody who is considering getting into the landlord game should know.
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
1. Landlording is a Business
It is not about sitting on a beach sipping fruity drinks while tenants write you checks. Beware of someone selling you a dream as opposed to a business tool. There are many “guru’s” out there selling a dream. But, there are also many “guru’s” out there selling valuable information.
Understand that building a successful business requires hard work and hopefully after a few years of hard work you will get to live the dream a bit.
2. Cash Reserves are Necessary
You will need cash at some point, so don’t spend it all on your first project and don’t spend all of your cash flow. Put some money away for a rainy day.
Things will break. Things get stolen.
You will need money to fix the heat or that leaky roof or your tenants will leave. Ultimately leading to a downward spiral that can be hard to pull out of. Don’t bet on insurance to fix things either. Too many claims will result in jacked rates and a loss of coverage.
You will need cash to cover unexpected emergencies.
3. Your Landlord Laws
The law will dictate so much of what you can and cannot do as a landlord. The law spells out what needs to be in your lease, how much of a late fee you can charge and how you must evict. You can get into a lot of trouble if you just throw someone out or change the locks.
Every state is different. Every city is different. Know your laws.
4. Your Local Market
Remember, location, location, location! You need to know the market you are investing in. What are good locations? What are not so good locations? What are the rental rates? What are properties selling for? If you do not know this basic information how will you know you are getting a good deal?
5. There Will be Repairs
Budget for it. Even if the property has just gone through a major rehab. There will be some amount of repairs. The standard measure is to budget abut 10% of your gross rents for repairs. After years in the business, I can say that, at least for me, this number is spot on. Budget for repairs in addition to reserves.
6. Other Landlords to Help You
This is one of the major reasons I advocate joining a local REIA group. Many times you will feel like it is just you against the world in this business. Having other local landlords to discuss your problems or concerns with or to just vent to can be a big help. There likely is no problem that other landlords have not hit before and can help you with.
Don’t have a local REIA nearby (or even if you do)? Make full use of BiggerPockets.
7. You Will Never Be 100% Rented All The Time
Budget for it. We have found in our business that we have a vacancy rate of about 7% to 8%. The standard is about 10% but it may be higher or lower in your market. Be sure to budget for the appropriate amount of vacancy.
8. You Make Your Money When You Buy
So many people think that you make the money when you sell, but it is the other way around. You can’t sell for a profit unless you buy it right and you can’t get good cash flow unless your buy it right. So be sure you know how to buy it right.
9. People Lie
Potential tenants lie. They will tell you all kinds of sad sack stories. Verify everything. Check them out before you let them in. People trying to sell properties lie. Phrases like “great cash flow,” “newly renovated” or “100% occupied” will all sound great but could be pure BS.
You need to understand the numbers of real estate to see through the lies before you get sucked into a bad deal. One bad deal can be a very costly lesson. Verify everything with your own research
10. Cash Flow is King
It is just that simple. Appreciation is a bonus, don’t bet on it. Cash flow will keep you in business through the good and bad times. Always remember that cash flow is king.
So, what’s in your top ten? Let me know with your comments.
Photo Credit: [bastian.]