It’s not an easy business being a landlord. All you see is the good life on the informercials. You see people sitting on beaches or on vacation in Las Vegas. But there are so many things you don’t see during those get rich quick marketing campaigns.
It is important that an investor in rental properties understand the ins and outs of the leasing business. I must say that since I’ve been a landlord, I’ve learned so much in a short amount of time. Most of the things learned were learned the hard way, trial and error or just by touching the hot stove! Well let me impart on you the top three things that are now engrained in my psyche!
1) DON’T overpay for a rental property!
It’s extremely important to know a property’s value. Duh! This may seem like an extremely basic point. But I don’t know how many people fall short of this fundamental principle. I recently did an analysis of apartment buildings that were purchased in Washington DC and I don’t know how many buildings were purchased at amounts way above their value. Before I started investing, I read a lot of books and every book stressed the importance of not overpaying for a property. An investor can not, I repeat… CAN NOT be led by emotions. If the property has the best location and no rent ceiling, do not pay a penny more than what the property is worth. And guess what… I have fallen in that trap before. More than once to my shame! Overpaying!! Putting my emotions into my analysis and justifying why I should make the purchase by how I feel. If you can’t be objective in your analysis then find some one who has a good understanding of financial analysis and have them run your numbers. That way you will have someone who has no interest in the property and can tell you if it is a good deal or not. Remember… asking price is different from purchase price.
2) DON’T underestimate the importance of routine maintenance!
Expenses eat away your profits. Normally when your expenses run high, it’s likely due to something that could have easily been remedied. Schedule periodic inspections with your tenants. It’s always better to catch problems either before they arise or while they are still minor. Also have your tenants understand that they need to bring to your attention anything that needs repair. I’m not talking about getting a new refrigerator every Christmas! Items such as leaky faucets, running toilets, cracked windows. After all this is your property and it is the most important asset in your rental business. If you are like me and don’t know a hammer from a wrench then solicit the services of a handy man. I think handy men are the unsung heroes to most businesses!
3) DON’T run low on reserves!
This, I believe, is why most landlord’s end up selling their properties. Reserves, Reserves, Reserves! One day a tenant will move out of your unit. Or worse, you will run into a wolf in tenant’s clothing. You know the one, the non paying tenant. If you don’t have the reserves to cover periods were rent revenue doesn’t cover debt service and expenses then your business will ultimately fail. Make sure you are saving some of the rental income each month to cover shortfalls. I know you may have the urge to put some of that income towards a new car. Or to take some of the revenue and go on a vacation. Believe me, there will be time for that. But the time is after you’ve built enough capital to cover the undexpected. Remember this is a business! If you keep that in mind then you will treat your units as such!
If you keep these three basic lessons in mind then you will have the foundations of a successful rental business!
Damien
"With Wealth, comes Responsibility!" Matthew 25:14-30
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