There are countless investors that want the fast returns. Just buy a rental property, sit back, and make money as a landlord. They think that just being a landlord will make them the riches they need to be financially independent. The tenant pays your mortgage, and you relax on the beach. You hire a property manager, set up automatic payments for rent to be deposited, and your mortgage gets drafted every month. All while you play.
Here is how to make that fantasy happen in reality
It is Not Your God Given Right to Make Money as a Landlord
The first thing you must understand, it is not your God given right to make money as a landlord, or make money in any business. There are high returns possible, and there are many investors that have gone broke chasing the dream. Understand, that to make money as a landlord, you need to treat it as a business. You need to do what it takes to create a profitable business. Businesses that lose money go broke. Businesses that are profitable, but have negative cash flow, go broke too.
You must have a plan, and work it. Hard.
No One Makes A Million Dollars
You must also understand, that very few people make a million dollars in real estate at one time. Or any venture. Even fewer that make a million at once as a landlord. You will make it like any other business, a dollar at a time, a million times over. A few dollars every month in cash flow, assuming you save or invest it, can lead to a large balance.
You need to negotiate with every vendor out there. Some will give you a better price, some will not. You need to understand the risks, and have a good risk mitigation plan in place. It is OK to take a risk, and long as you know your outside cost. If you are not prepared to spend that ‘risk’ money, do not spend the investment money.
If your risk is too much, you must be capitalized well enough to recover and try again.
Raising Rents to Make Money as a landlord
Everyone knows that you can just increase rents to pay your property bills. Or increase your lifestyle. After all, your tenants are in place. They hate to move. You like money. A perfect combination. You just need a new wheelbarrow to haul your money in.
Raise a $1,000 rent by $25 a month, you take in another $300 a year. After expenses, you are likely left with $200. Raise it $25 too high, and your tenant leaves and you are out $1,000 a month, maybe for multiple months. All for $300 a year.
Advertise your rental at $25 too much, and great tenants go to a better value. Only tenants that will not be accepted anywhere else will apply at your place. You fall into the trap and think all tenants are low quality as that is all you can attract.
When you take in a bad tenant, you can lose five years of profits, or more.
Mistaking Deferred Maintenance for Profit.
Roofs, water heaters, HVAC systems, driveways, windows, flooring, and even paint wears out. Often a landlord will skip a few things and see their profit soar. This may work OK for a short time, but sooner or later a large expense will present itself. A furnace goes out, you have to replace it. A City official says you need to fix your building to get a rental license, you are out of business if you do not fix the item. Leave a renter with a leaky roof, and they move out.
Make no mistake, if you are not spending at least 10% of your rents on either fixing things, or saving that money in a maintenance account, you should be. It may even be up to 20% of your rents on older properties. If you are priced a bit low, that 20% number could even be higher.
Vacancy Is Your Number One Avoidable Expense as a Landlord
You cannot reduce your mortgage payment, unless you pay it off. Attempting to reduce your property taxes in any significant fashion is generally futile. You cannot reduce your utility bills very much, and even if you could it would not be much in terms of total dollars. The same with insurance and any Homeowners Association dues. You can almost always reduce vacancy costs. Unless you have zero vacancy, that is an easy cost to reduce.
You can always increase demand by lowering price. This is true for any widget you are selling. Rental property is no different. If you do not maintain your property, a renter moves out. Bring in a sub-par renter, and you may have to evict. Price your rental too high between tenants, and you will be vacant for a longer period of time.
Bring in a bad tenant because you panicked and could not take the vacancy expense, and you will suffer greatly.
Price right, know when to adjust your price up or down, and keep your tenants happy.
Anyone can be a Millionaire
Here in the USA, anyone can be a millionaire if they have enough drive, ambition, fortitude and willingness to do what it takes to succeed. Never underestimate the ability to accumulate wealth here in the USA if you try hard enough. If you continually blame others for your lack of achievement, you will never achieve anything.
If you continue to look at yourself and think “I cannot do that because …”, you will achieve exactly that, nothing. Think of a different way, a different tactic, a different skill you already have, that you can leverage.
Show me a self-made millionaire, and I will show you someone who is not afraid to work. Show me someone who is not a millionaire, and I will show you someone who is satisfied with not being a millionaire.
There are some people that may have to work harder than others due to their own limitations, but it can be done. Pick a skill closer to your own expertise, do not rely on others to plan it for you.
Are you a millionaire? If not, what are the obstacles facing you? What do you think you need to do to become one?
This is a great reality check for those who think landlording is easy and that rental property is easy to manage. Thanks for sharing the tips!
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the reason for big rewards, is the big risk. I have been very successful at it, but I have also learned many lessons the hard way.
So true! RE investing is difficult and time consuming. Most people think you can just buy it and let it sit. So wrong!
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Even if you hire a property manager, it can be a lot of work managing the manager…
Thanks for the reminder 🙂 It’s good to have a reality check every once in a while. We have already seen a few things, but for newbee’s, this really is key to realize!
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As you well know, there is no free lunch in landlording or any real estate investing. It is hard work, and takes money. There is a lot a lot of risk. If it was easy, everyone would be doing it.
I’ve received those kinds of questions, too. I tell prospective landlords to buy the cash flow — not what some seller or real estate agent claims you should pocket when selling.
This strategy doesn’t depend on home values continually going up, which sets it apart from the house-flipping speculation that cost many home buyers dearly when the market collapsed.
George Lambert
Author, What You Must Know BEFORE Becoming a Greedy Landlord
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As always George, you are right on the mark. Far too many investors went broke chasing appreciation and depreciation, rather than cash flow.
wow, these are all great points!
As a tenant, I hate my rent being raised, so I don’t raise rent in while the tenant is in place. (With one exception, when I took over the property, the previous owner rented wayyyy below the market price, I raised it, still below the level I rent out to other apartment in the building, in the same area. Other than that, I keep rent the same, especially for tenants that have been paying rent, and haven’t caused any trouble.)
“The biggest expense is vacancy”. That is totally true!
I have one unit that goes unfilled, but I’m not backing down on who I want to go in there though. I’m afraid that it’s harder to evict them for non-paying rent than to rent it out to somebody who’s qualified.
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You are correct. It is better to be vacant than take a bad tenant. You may have to lower price just a bit to increase demand for your unit.
I’ve learned to never be desperate for a tenant …
Most people are honest and hardworking. And I’d venture to say that 96 percent would be terrific tenants. But you need to screen them all to sort out the 4 percent who are potential problems.
I can deal with someone who has had problems with the law. Everyone deserves a second or third chance. And as far as credit scores go, don’t expect an 800. There’s a reason why they’re renting; they may have a low score because they lost their home.
My biggest concern is getting stuck with a tenant who has a history of destroying previous rentals or not paying the rent. And I tell them upfront that if this type of thing shows up, the deal is dead. The tenant pays the background-check fee and gets it back if they pass.
I’ve violated this policy several times, mostly when the economy was in the slumps and I’d have 40 or so applications on my desk. And it has frequently come back to bite me in the butt.
George Lambert
Author, What You Must Know BEFORE Becoming a Greedy Landlord
Being a landlord is not a lift to quickly become super rich. It takes time still it is worth to invest in apartments for rent. Great article.
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You are right. It can be worthwhile, but it is certainly not without risk.
Excellent and entertaining read! I like your point about mistaking deferred maintenance for profit in the bank. It’s easy to look at your growing bank balance and forget about the upcoming roof repair or unexpected expense.
I recommend keeping a separate savings reserve account and periodically transferring extra funds from your operating account into your reserve account. It’s a good way to make sure you have the funds ready when surprises hit you.
Keep the great articles coming!
Domenick | AccidentalRental
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I see many investors forget about expenses such as capitalized long-term maintenance, property management, and even vacancy. Even offices expenses that rare necessary to keep up with your investments can be overlooked.
Great article. How do you deal with raising rent on long term tenants who don’t give you problems? I’ve got a bunch of underpriced units which would need total gut jobs 5-8k in work that I’ve kept rents a bit lower knowing that the money is guaranteed and I won’t have to fix much. The people have been there for anywhere from 6-20 yrs….Just wondering if you do the same…
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I have similar properties, one anyway. I kept the rent the same for a long time, but at some point you have to keep up with your expenses. The same renters that vote for more school taxes (or other taxpayer funded programs…) can pay a bit more in rent too.
How to handle increasing a tenant’s rent can be a touchy situation. But I’ve found that if you want to keep good, long-term tenants, be proactive. That means inspect regularly, respond quickly, and be creative. Look at how to improve things while they’re still there. Reward early payments, offer extra services like direct deposit, or tenant insurance.
New paint or carpet or even a security system if they pay the monthly monitoring fees could be a good gesture when it comes time to renew a lease with an increase in rent. Even a gift certificate to a local pizza joint can go a long way.
Good luck!
George Lambert
Author, What You Must Know BEFORE Becoming a Greedy Landlord
I had a friend who owned several houses that he rented out to local college students. He’d give a $50.00 per month discount if the rent was paid in full for the entire year when they moved in. No chasing rents, no bounced checks, and more invested tenants.
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Great tips! Having tenants with great credit scores keeps the hassles of collecting rent, but getting it upfront is always better.
This posts contradicts your post on doing inexpensive renovations, and your post on painting. My wife and I spend 3-4% of rent on maintenance, and that’s enough to slowly improve the finish level in the properties. As you know, replacing old cushion floor with tile is cheap. Dated carpet can be replaced with laminate wood flooring for < $1/sf. Modern and stylish light fixtures can be found for $20. A fresh coat of paint for shutters and the front door usually costs less than $50.
The best maintenance bang for the buck I have found is water heater anode rods. A new 40gallon electric hot water heater tank will cost around $300, but if you replace the $30 anode rod, the tank will last 2-3 times longer before it rusts out and needs replacing. With a good size breaker bar and a 1 1/16″ socket, it’s a 10-15 minute job to replace the anode rod.
If you need to spend 10% of rent on upkeep, that sounds like high-maintenance properties. Vinyl siding might not look as fancy as wood and stucco, but for maintenance all it needs is a pressure wash every few years. Vinyl-clad windows never need painting, and many manufacturers have a lifetime warranty on the glass seal (spacers can fail, causing windows to fog up). Metal roofs, and even newer fiberglass laminate architectural shingles can last 40+ years.