Yes, the rumor is spot-on. Being a landlord is no fun at all. There are endless sources of troubles, such as …
- bad tenants: those who do not pay rent on time, or even worse, who trash your house.
- contractors: think about finding the right contractors, and scheduling them with your tenants.
- insurance companies: they are particularly picky on rentals.
- city/county/state regulation on rentals and building code: these regulations can change at anytime, and you have only one choice which is to comply.
- neighbors of your rentals: in general, people do not like rentals next to their homes.
- taxes: even if you outsource your tax preparation, you should still know the tax code so that you can review your tax return.
Before committing to be a landlord, ask yourself the followings.
- Does your potential rental actually have a positive cash flow?
My accountant once said, “oh you are doing pretty well, as you are actually making money out of your house”. Surprisingly, a lot of landlords are putting money into their rentals every month to keep it going!! This is particularly true in the case of condos. Do not fool yourself that you’re having a sound investment if your rental does not produce a positive cash flow unless you have strong evidence that your rental will be appreciated at a very good pace in the next couple of years. Your house can have many things going wrong as you can’t possibly imagine. That involves not only financial resources, but also your time. So ask yourself, is your rental really worth your time and financial resources? Can you actually come out ahead compared to investing in an index fund?
- Will you self-manage the property or outsource that to the property management?
You can hire property management companies / real estate agents to manage the property. I did not because of the hefty 10% management fee. If you plan to purchase multiple properties, it’s best that you get your hands dirty to the nuts and bolts of managing tenants and building relationship with contractors to fix your house.
To ease the stress of self-management, there are things you can do before your tenants move in to avoid the potential endless phone calls from your tenants:
- properly inspect your property and fix the issues
- deal with all the county/city/state rental requirements, i.e. rental license, lead paint inspection if any
- carefully screen your tenants. A good credit score can only tell so much. Meet your potential tenant and get a feel of how decent this person is. My agent somehow has a very good intuition on people, so I always ask him to screen tenants for me.
- spell out tenant’s responsibilities clearly in the contract, i.e. lawn maintenance.
Rest assured. Most tenants are reasonable human beings. They usually do not call you in the middle of the nights. Think about it; they are also afraid running into a slumlord. So treat them nicely, and usually they will do the same to you and your property.
- Do you have an emergency fund for renovation and repairs in the house?
As a landlord, you will run into fixing houses a lot more than you may expect. Do not rely on the number of times you have to fix something at your home as the indicator on how often your tenant will call you. Fixing houses is not cheap. The rentals I have are built in the 1960s era. They are solidly built compared to a lot of new houses these days. However, since they are old, and the maintenance were somewhat neglected during the time the houses were foreclosed or under short sale, so in the past couple years, I did a lot of repairs and a big renovation.
Here is a brief summary of what I have done in the last couple years.
- All my rentals have new water heater and HVAC system. The water heater runs about $750 each and the HVAC system is at $3,500.
- One of my rental had sewage backup issue to the basement. I got plumber to snake it twice, and each snake costed $400. Eventually, I found out the sewage pipe somehow was broken up in the middle of the front yard, and hence the sewage backup. The pipe was buried 15 ft below. To replace it, I need a permit and inspection from the county. This whole project set me back another $5,500.
- A total renovation of a basement was $20,000.
- Cutting down dying trees was $1,500 each. P.S. Don’t forget ask your contractor to leave you some good firewood if you have a fireplace at home.
- Other miscellaneous issues, i.e. replacing thermostat, carpets, appliances.
To summarize, BE PREPARED. Your total cash listed in the HUD may not be the only money you have to put into the rentals.
- How are you planning to spend your rental income?
Here are some of the possible ways:
- pay off the rental mortgage, if any
- save it as the emergency fund for the rentals
I can share my experience in the past few years. At the beginning of my landlord journey, I needed the income to pay for the repairs and maintenance, so I basically saved all the incomes. Couple months ago, it got to the point that the rental income was no longer being spent right away on repairs, so I started to ponder the best way to spend the income. Here is my current strategy. As long as my rental emergency fund is at the level I am comfortable with, I use 50% of the income to pay off the mortgage, and another 50% to invest in the 60% stock and 40% bond mutual fund. If my emergency fund got hit again with any big repairs, I will reduce amount going to the investment to replenish the emergency fund, but I’m not planning to slow down my mortgage paying off process.
Yes, I know I can potentially come out ahead if investing 100% and not paying off the mortgage. However, I do not feel comfortable keep taking leverage of debts to invest. I rather be conservative, but have my rentals all paid off. Having baby Z definitely change me. I now want to have the option of having a part time job or entering into semi-retirement. In order to do so, the Goldilocks household should have the debt level reduced.