Acquiring rental property for passive income is a great way to long term wealth, but there is more work required than it appears on the surface.
Aspiring landlords are misinformed about how much work is required to build a successful stream of passive income. It’s more than hiring the right property management company, and making the right acquisitions.
In a recent conversation with an aspiring landlord I was reminded of how misleading mainstream media portray the ins and outs of real estate investing.
The conversation started by discussing the returns that can be made a month from a small rental portfolio. I began to introduce some of the numbers and concepts such as cash on cash return, NOI, vacancy rates, and cap rate to name a few. All of which he had limited knowledge on.
The biggest misconception that was presented is as long as you have a good property management company then you will have minimal problems. I provided him with some information and resources such as Bigger Pockets to learn from. I figured if he was misinformed about the management of rental property then there are others.
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Here are 3 Things New Landlord Need to Manage:
The following are the 3 reasons new investors need to manage their own properties. It teaches you so much valuable information that you really shouldn’t miss the opportunity!
1) Financial Responsibilities
Understanding the financial responsibilities of a rental property is extremely important.
It is great to have an accountant on your team but in the beginning this may not be feasible. I suggest becoming familiar with monthly financial reconciliation.
You don’t have to have an advanced degree in finance, but by using quick-books anyone can set up an account and reconcile the monthly income and expenditures for each rental property. Any investment should go through rigorous financial analysis prior to the acquisition but afterwards, monthly report reconciliation will present a clear picture of how the unit is actually performing.
2) Trade/Repair Management
Trade management is equally important.
Some investors leave this duty to the property management company, but it is great to have your own resources in the event the property management company may be limited in a certain area. If you have a great property manager you will not have to be as concerned or may not utilize your resources as much but its good to have trades in your tool chest when needed.
It is important to have an independent plumber, electrician, or carpenter on hand. Not to criticize property managers, but in this profession it is always good to have a back up trades. The reason for this is because you may have relationships where you can be billed for services performed after hours or paying invoices at net 30 or 60 versus immediately, this is depending upon your liquidity of course.
3) Tenant Screening/Rapport Building
Tenant rapport building is great when you are starting out.
Again, this is for a smaller portfolio of units or maybe 1 unit. Learning the tendencies of tenants will teach a new landlord what makes a good tenant and what are some characteristics of a terrible tenant. By understanding these tendencies will assist you in ensuring you have the right tenant in your property.
Related: Tenant Screening: The Ultimate Guide
Having a great property manager is critical to expand your business when you are ready, but when starting out these 3 things are best learned through hands-on experience.
Do not leave these 3 simple but important pieces to a property manager when starting out as a landlord. I would recommend managing your own property for a couple of years to learn the nuances of being a landlord before hiring a property manager.
If you know of any other areas a new landlord should manage in the beginning please share your thoughts!
Be sure to leave your comments below!