Real Estate Investing for Beginners: My First Rental Property and Lessons Learned
Everyone has to start somewhere. And starting something new can be extremely scary. Purchasing my first rental property was entering uncharted territory and to be honest, I didn't know any landlords other than the one I had paid rent to for 8 years. So there was a huge learning curve ahead of me. No matter how much you read, and I was pretty well read on the topic, real life experience will always accelerate your learning and teach you so much more in a much quicker timeframe.
Lesson #1: Your property must always cash flow from the beginning.
Now I knew this from reading books and I had ensured that my property would indeed cash flow from the beginning. However, not having done this before, I chose to have a much shorter mortgage term, so that I could pay of the property quicker. This tradeoff meant that it would be cash flowing much less in the beginning than if I had taken a traditional 30 year mortgage. I was okay with that though because I still had a day job so I didn't really need the money. The lower interest rate was a way to save money, and the idea of reducing my debt quicker was appealing.
Two months into owning the property, after it had been rent out out steadily, I quickly discovered why it was so important for my property to cash flow from the start. I got a bill I was not anticipating- the water and sewer bill.
I know, I know, this sounds silly. Of course you have to pay the water and sewer bill you say! Well, I didn't know that. After having made all my lists of all the possible expenses, consulted my landlord, consulted my mentors, and run through the numbers ten million times (while estimating high on each one to ensure I had a solid buffer zone) I some how still had this bill that had escaped my radar! It was frustrating and I only had myself to blame.
Fortunately it wasn't the crisis that it could have been if I didn't have:
1) Back up cash for emergencies in savings
2) Cash flow from the very beginning
This nuisance of a bill did reduce my profits a little bit from where I anticipated, which always sucks, but that's alright. I chose to look on the bright side and it gave me an opportunity to learn about ways that I, as a owner, could reduce water usage at the property. So it ended up being empowering and educational and not too much of a painful lesson to learn. Now, as things wear out I will replace them with low flow toilets, shower heads and more economical washing machine thus reducing my costs and increasing my revenue again.
Lesson #2: Only work with professionals you trust.
This seems obvious and straightforward, but often times new investors (myself included for sure) worry that if this one person is unable to do the job, will I be able to find someone else who can? The answer is yes. Yes you will.
Never move forward with any professional that makes you feel uncomfortable or disempowered. This is your business. You are building long term relationships because you (hopefully) intend to keep investing. I always prefer to pay a bit more for someone who I know is legit and does quality work.
Never move forward with any professional that makes you feel uncomfortable or disempowered. This is your business. You are building long term relationships because you (hopefully) to keep investing. I always prefer to pay a bit more for someone who I know is legit and does quality work (a bit more, not a ton).
How do you know if someone is legit and does quality work? Well you don't always. But there are steps you can take to reduce the likelihood of hiring a shady contractor and/or property manager. First, ask for recommendations from people you already know and trust. They will steer you in the right direction if they know someone. And if they don't know anyone, then look up reviews online and contact multiple people. You can usually get an idea of how professional the operation is by the time it takes them to get back to you. If it's too long, and you have do follow up calls, take that as a warning that you will probably have to do that regularly if you hire them. Lastly meet them. How do they treat you when you ask them questions? Do they get annoyed or act like you should know certain things? Or are they open to the conversation and satisfying your curiosities as a client?
Only hire those people who you trust and you have a positive rapport with. If this is going to be a long term relationship you will be interacting with this person a lot. The more you like him or her, the easier it will be. Also trust only comes when you believe someone is competent. Check their work and make sure they are in fact competent at what you are expecting them to do. After you hire them, take care of them. Good people are hard to find and quick to lose if you treat them poorly.
Lesson #3: Always have a reserve of money.
I mentioned this before, but it's worth mentioning again. Anything can happen at anytime. The boiler could go out, the roof could start leaking, a car could plow through your front fence in a high speed chase trying to outrun the cops (don't laugh, this just happened to an investor friend of mine!). When investing, you need to be able to sleep at night knowing you can cover your bills, debts and what not. The only way to do that is to have a chunk of money ready just incase you need that safety net for the unexpected.
Decide on your amount and set it to the side. Never go below that amount. If an amazing deal comes along and you have that money, do not use it. Find another investor or lender. Get creative. That money is your piece of mind money that should be ready on a moments notice to do just that- be your safety net.
If you spend some of it, on an emergency. Then that should become your top focus and priority, replenishing it, until you have built your emergency fund back up to hit that target number again. Don't go without it. This is your insurance that should things go south, and they always do at one time or another, you are covered. There never really is a good time for something to break, but if you have the safety pot in place, that is the closest you will ever get to having a "good" time for something to break.
Lesson #4: Screen tenants carefully and never rent to unmarried couples
Our first tenants were awesome. Our property manager had managed the apartment complex they had lived in for years. There was a solid relationship built up between them of trust. They came highly recommended and moved into our little house to have more space for their growing family. They resigned the lease after the first year for two more years. It was all going very well.
Then one October morning I get a call from the gas and electric company saying that the tenant at my rental called to cancel. It took me by surprise. Why would they cancel their gas and electric when they still have 8 months left on their lease? Well turns out they broke up. Long story short, she took the rent money for that month-- my money--and left. She used that cash to put a down payment on a new place, and left him (and me) high and dry. Great.
Of course my goal was to have him finish his lease. That would have been the most ideal scenario in my mind. So, being a landlord with integrity I gave him a sufficient window to find a roommate, make the back payment, and get caught up. In the end though, he just couldn't do it.
He moved out and left everything. I mean everything--furniture, clothes, pictures of him and his ex, children's toys and an overstuffed fridge complete with meals already prepped for upcoming week! I got the impression that he really didn't think he was gonna have to leave. It was sad and to be honest disappointing.
It took over a month to get everything out, the place cleaned up and rentable again. It was a lot of backbreaking work. And truth be told, we got off easy because he actually left. I've heard horror stories of professional tenants who destroy properties and it takes months to evict them. Luckily, that wasn't the case. But it was a financial loss for a month and I had to eat all the clean up costs initially.
So moving forward, I understand even more deeply why selecting tenants is extremely important (more on this in a future blog post). I also know now that even if your landlord knows someone beforehand, and has a strong relationship, there are no guarantees. You do your best to put screening strategies in place but as with everything, there is still a chance that it may not turn out as you hope. That's part of the risk you take when investing in real estate.
Lesson #5: Charge extra for dogs or pets
Now I'm the worlds biggest dog lover. It's true. Just follow me @mackofalltradesNY on IG and you will see a million pug pictures. #sorrynotsorry But as a business owner, I do recognize it is fair and important to charge for pets.
The wear and tear they place on a property has to be compensated for. Some tear up yards, some pee inside (which is disastrous if you have wood floors), some chew or scratch door frames, etc. It's only reasonable that you are compensated for that along the way because you will have to fix that for the next tenant when they move out.
Or, if you don't want to deal with those sorts of repairs you can just not allow pets. Keep in mind, this doesn't mean you won't have similar repairs because people can put wear and tear on a place too, but it is much less likely that you will have the same level when there is no pet.
So prohibiting pets could be the policy you feel most comfortable with. It's up to you. That will reduce your tenant pool significantly. Especially in trendy areas because people love their dogs.
Also it's important to keep in mind a service animal is the exception. You cannot deny renting to someone with a service animal. It's illegal. The good news there though is that most service animals are already extremely well trained and don't often cause the same level of damage that regular ol' household pets do.
Lesson #6: Taxes will go up. Plan for it.
We all know taxes never decrease. That's just how it is. With inflation everything costs more over time. We know that because that is one reason why we are so interested in buying property, we know it will go up in value in time. Well that also works for taxes. The higher the value of the property you own, the more you pay in taxes.
When does it go up? Well each jurisdiction is different. Some reassess every year, some every few years. It just depends. Plan on an increase in taxes to keep par with the increase in inflation, which is usually 3-4%. If you want to be extra safe, plan for a little bit more so you are never surprised.
Lesson #7: Evictions will happen. It's part of the game. Do it in a fair and dignified manner and be respectful.
Even great tenants, may turn into tenants that have to be evicted. Remember my story from before? I thought I had the most reliable tenants in the world and they were, until they weren't. Don't let an eviction deter you from continuing to invest in real estate though. Risk is an inherent part of investing, but there are also some perks built in to support investors and buffer you from some of the risks. One such perk is that if you do suffer a loss, that can be written off on your taxes thus helping soften the blow. And if you have enough write offs, they can roll over into the following year.
The main thing is to not freak out. Get the property cleaned up and on the market as soon as possible for as little money as possible. If your property was left in a state of disarray, take a detailed list of all the damage, snap photos of everything and ensure you have all the receipts for any supplies, materials or services you had to pay out of pocket. You will need all this should you choose to pursue legal action.
If you were out of pocket just a little money I would recommend you let it go. Remember the 80/20 rule? It may not be worth the hassle of pursuing them if you had a loss of only a few hundred dollars. However, if it is substantial, and you are willing, you can serve them and try to get them them to pay off the damages in order to avoid court. If they aren't cooperative you can then pursue legal compensation in court. It's really up to you.
Lesson #8: Get to know the neighbors. They are your eyes and ears on the ground.
This is essential and extremely beneficial to you. All neighbors want to live next door to good tenants because it improves their own quality of life. Most people prefer safe, quiet and clean people living next door. By befriending as many neighbors as possible, it is the equivalent of installing a security camera. If something's up and it it's effecting their lives, they will be sure to let you know. This is even more important if you are self-managing the property or if you live far away and you rely on a property manager.
Lesson #9: Encourage good tenants to stay.
Tenant turnover is costly. Even with the best tenants, who leave your place spotless, it will cost you because it takes time to find and screen new tenants in between leases. It also takes time to ensure you find quality people to rent a property out to next. So whatever you can do to keep your tenants there longer, do it.
I like to write my tenants thank you notes twice a year. Once around the holidays and once mid year. Just a little note to let them know that I appreciate them being responsible and paying their rent on time.
Additionally, I am open to tenants fixing up the property they are renting with place with my approval in advance of course. Why? Well, the more they nest, the more they will want to stay! Also, if it adds value to my property, they are saving me money from doing so. It's really a win/win!
For example, one of my new tenants wanted to paint some rooms upstairs after we finished out the attic space. I told her no problem. Even if the colors aren't my choice and would need to be repainted down the road, if she likes them she will be more satisfied and probably want to stay there longer. Plus, I always appreciate it when my landlord would let me personalize my space.
Lesson #10: Always act with integrity.
As an investor you want to be trusted and respected. You can only earn that if people believe you have integrity. I have this little sign on my desk that says:
Honor your word. Do what you said you would do, by when you said you would do it, as it was meant to be done. When you don't, clean it up. Make new promises and keep them!
Being a slumlord will cost you way more in the end than what you think you might save right now by skimping. Quality tenants want a safe, solid place to live. If you don't provide that, you will not be able to attract the type of tenant you want in the long run. If you aren't ready to ensure your tenants have a safe, clean, respectable place to live, then real estate investing is not for you.
Lesson #11: Don't give up. It is a long term investment.
Rentals won't make you rich over night, but over the long term (if managed properly) they will. So it's worth it to put in the work and be persistent. There are going to be some months that are tighter than others. The boiler will break. You will get hit with unexpected costs. It's going to happen. While that sucks, look at the bigger picture: other people are paying off your debt on an asset that will increase in value over time.
If you do your research right, stay on top of your game, and look for ways to minimize costs your investment will provide you with tax benefits, cash flow and it will appreciate in value. That is pretty incredible when you think about it! And that is why real estate stands out as one of the most lucrative forms of investments. You have to play the long game with rentals though in order to reap the benefits down the road.
As I go into my next investment property, there will surely be more lessons to learn. But hopefully as I continue to read more, meet new people who are already successful in this field, I will be able to use their experiences and lessons to accelerate my learning curve and hopefully avoid some costly mistakes.
But alas, mistakes will be had! It's part of the journey. Each one is put in your path to teach you something new along the way and help you to become even more creative in terms of reaching your goal. So don't fear making mistakes. It will inevitably happen. Just continue to learn from them and don't let them slow you down on your road to financial freedom. You will eventually get there, and you may even surprise yourself by how quickly you get there!
As always, happy investing!