One common way to try to make passive income is by investing in rental properties. It can generate a monthly profit for you, and it will also help you build equity faster. However, this can be a complicated and stressful industry if you enter it blindly.
Ultimately, the choices you make as a landlord can drastically alter your profits and even your peace of mind. If you are solely focused on money in this business, it can have negative effects on your overall success. I've put together this guide to help you decide whether investing in rental property is right for you. I'll also be giving you some tips in this post that can avoid unnecessary expenses and maximize your long-term earnings.
Buying Houses Cheap
To be a landlord, you first need to own a house that you can rent to others. This initial phase can make or break the success of your entire business. Ultimately, your investment price on the house is what will determine the rental price, the overall economics of the business and especially how much profit you will make each month.
Obviously, the cheaper you buy a house for in the beginning, the more you'll make leasing it out. For this reason, foreclosures, tax auctions and distressed properties are usually the most appealing. Those homes can be obtained cheaply, and then renovated to make them livable for much less than buying a home in good condition.
Remember, your goal is NOT to provide a big lavish house with tons of amenities. You're looking for functional, simple living space. This keeps the price down and ultimately allows you to rent your property for a lower price too.
Rental Property Renovations
Once you've obtained a house, you need to fix it up to be able to rent it. This may also be necessary in between tenants too, although hopefully the repairs will be much less. Minor things like new paint and new carpets may be needed after a tenant leaves. However, a newly obtained home can require more extensive work.
Again, you're going for simple and functional here. Make the house look good and livable without going overboard with improvements unless there's a good reason for it. Balance your renovation plans with your purchase price. Have a total investment goal for each house so you can appropriately predict a rent price and monthly earnings before your renovations begin.
In some cases, you may be able to do some of the repair work yourself. If you have the skills to do a good job, this can be an option that lets you renovate cheaper. Certain projects will require a contractor, like electrical and plumbing. When you do need to outsource work, try to form relationships with these companies if you plan to renovate more houses in the future. It can be really useful to stick with the same work crew to keep costs down and even to speed up future renovations.
Property Management Companies
Once you have a house fixed up and ready for people to live in it, you're ready to put it on the market to find new tenants. However, there is one big decision to make at this point in the rental process. Do you want to rent and manage your homes yourself or pay someone else to do it for you? If you are seeking a truly passive income, using a property management company is usually the best choice.
Personally, I think property management companies help to separate your personal feelings from your business. I've seen a lot of homeowners move into a second home and then rent out their original home. They're very personally attached to those houses and tend to be worse landlords as a result. Letting someone else handle this part of the business allows you to detach from those feelings.
Experience is a major factor here too. If you just plan on printing a lease agreement that you found online and winging it as a landlord, you'd probably be much better off with a property management company. Contracts, requests for repairs, inspections and background checks are just a small handful of a reasons why you may want to avoid managing your own houses. These companies will charge you each month for their services, but it really allows you to have more peace of mind and just collect a check each month.
Property Taxes & Maintenance
Besides the purchase price, renovation costs and potential property management expenses, you still have other factors to consider before deciding on a rental price. Property taxes, insurance and ongoing maintenance are other major expenses you must consider.
If you have a mortgage on the rental house, property taxes and insurance may be included in the monthly payment already. However, you also have to consider whether these expenses will go up in the future. I live in Florida where it's almost a fact of life that your property taxes will go up each year. Other places may have more stable taxes. Insurance can be the same thing - hurricanes keep raising prices around here. This is why it's usually a good idea to only offer one-year leases to potential tenants. It gives you the opportunity to evaluate expense increases each year to adjust the rent price accordingly.
Ongoing maintenance costs should also be considered in advance. Most of the major house fixes, like a new roof, are usually on a timeline. You should know when your major expenses will be due. Factor these expenses into your overall costs to be sure you're not losing money after these repairs. Other maintenance will be cheaper but can still add up in some cases. I've seen houses go years without needing a minor repair, but others need them every month or two.
Rental Property Evictions
I've seen angry, irate landlords threatening tenants with eviction for making simple repair requests upon moving into a new house. Those same landlords usually resort to telling lies in court to attempt to remove a tenant that they view as wanting too much. In reality, spending $100 to fix a broken fan or even to repair something silly like a missing dishwasher button is much cheaper than a $10,000+ court battle and lost rental fees from turnover (yes this really happened and isn't just a hypothetical situation - some landlords are just really that arrogant and honestly stupid).
I've seen landlords rent their home in a poor home buying market. When the market quickly recovered and shot to all-time highs, they started causing problems with their tenants to provoke an eviction. More lies on court documents and an expensive court battle drains extra money. The tenants eventually agree to move out because they're sick of the psycho landlord. The landlord regains possession of the home and quickly puts it on the market for sale.
The landlord probably thought it made the most financial sense to do this and didn't care how they affected the family. It turns out that the landlord's timing was really bad though. Had he waited until the lease expired and then sold, he would've sold the house for 30% more, which amounted to another $300,000. Karma can be a nasty mistress. The two landlords I mentioned here are in fact the same person, so you can plainly see how this guy is not good at being a landlord. He's really just a hot head that happens to have money for now but likely won't long-term with those decisions.
The point I'm trying to make here is that you want to avoid unnecessary evictions at all costs. You may dislike your tenant and think you're somehow getting back at them by evicting them, but in reality, you are actually just messing up your own financial situation with your rental property. Even if you win an eviction case, you'll never recover court fees from the tenant. Bottom line, unless someone is destroying your home in a major way and/or not paying their rent each month, DO NOT think eviction is a solution. It will just cost you in the end.
Turnover & Happy Tenants
Ultimately, every time a tenant leaves and you have to find a new one, you'll lose money. Your rental property needs fixing and often painting in between tenants. The house will also sit vacant for a period of time while it's on the market. All of these factors result in lost income for you, so you want to do everything in your power to minimize these losses.
As long as your tenant pays rent on time and keeps the home in reasonable shape, you really shouldn't care about anything else. This is the ideal tenant. To nit-pick anything else really says more about you as a landlord than the tenant. If you can't help but to keep an eagle-eye on your rental property, get a management company instead.
With an ideal tenant in your property, your #1 goal should be to keep them happy and make them want to stay in your house as long as possible. No vacancies will simply mean less work for you and more profits in your pocket. Keeping a tenant happy means timely repairs when requests and simply leaving them alone the rest of the time. People have a life and don't want to spend it dealing with their landlord. One of the best landlords I've ever seen also used to give a decent gift card to a nice restaurant each Christmas. That landlord understood the value of low tenant turnover and went out of his way to try to keep good tenants happy.