If you’re thinking about buying rental property read this post about rental property lessons that I’ve learned the hard way. With housing booms in the US and Canada, owning rental properties have become all the rage. Nowadays, it’s hard to find someone who doesn’t own a rental property or who is planning on buying one someday. It’s no surprise that many people look at owning rental properties as safe investments because we are bombarded with HGTV shows that tell us that no matter what happens, we will ALWAYS make money owning property. (Seriously have you ever seen someone NOT come out ahead on any of those shows???).
I think it’s time to get real about owning rental properties. In this post I’ll discuss my experience with owning rental properties. After discussing my experience with other property investors, I’ve come to realize that many others have had similar experiences.
First, just let me say that if done right (something few people can do), rental properties can be a very profitable investment. But I want to be clear about the pitfalls of owning rental properties. So here are some lessons that I learned the hard way.
Rental Property Lessons Learned
1. Rental properties require a huge investment of your time.
Yes, that’s right you’ll spend way more time than you think on dealing with your rental property. Even if you use property managers, you’ll still spend lots of time overseeing their work (or lack of it). At one point it literally became a part-time job for me…and I used property managers!
2. Tenants cause a lot of damage…
and it’s nearly impossible to get the money out of them. We’ve all heard the stories about chasing down tenants for late rent, but when it comes to your investment property, the greatest threat a tenant poses is damage.
Even good tenants can cause serious damage simply by having a pet. Have you ever had to get cat piss smell out of carpets? Have dogs chewed the wooden railing, or scratched the shit out of hardwood floors? Yes pets can be the number one reason for damage caused by tenants. Unfortunately for landlords, there is very little you can do to prevent a tenant from bringing a pet into your property…even if it is in the lease! Good luck trying to evict someone for having a pet.
3. The Problem with Property Managers.
Take it from me people, the property management business is a license to rob. If you own rental properties and are using property managers you are getting ripped off whether you realize it or not. Property managers lie, cheat, steal and screw investors so beware.
One property manager I used was an outright fraud, while the other screwed me by not really doing anything at all (I always questioned how they justified their fees). I spent lots of money fixing up my properties and paying the property management fees. All the while, the property manager wasn’t really interested in finding tenants for my places. Month after month I heard one excuse after another. I started to question if they were really showing the units at all. In fact, I even went so far as to place ads on Craigslist and refer people to my property manager, only to be informed by the people that the PM never showed up for a showing or couldn’t accommodate them etc.
And that really is the big problem with employing property managers…how do you really know if they are doing what you are paying them to do? After all, the reason we use property managers is so we don’t have to look after the property ourselves. But you’ll find that you’ll be examining every little expense and trying to oversee what they are doing…especially when you have vacancies and the bills are piling up.
My biggest concern with property managers has to do with the structure of their fees. They are designed to enrich the property manager at the expense of the property owner. Some PMs charge a tenant placement fee or finder’s fee. Whenever they fill a vacancy they get a fee (anywhere from 60% to 100% of 1 month’s rent), plus a percentage of the monthly rent (7-10%) each month. The problem with this structure is that it gives the PM incentive to throw bad tenants into your property and encourages high turnover rates.
The other structure is just a flat fee of say $100-$150 a month (or 10% of monthly rent). The problem with that is that the PM has no real incentive to fill a vacancy. They can just sit back and let properties sit empty…why should they care… they’re getting paid anyways. After all, doing showings and reviewing tenant applications is hard work, not to mention the pain of collecting rent and dealing with tenant issues. It’s just easier for them to do nothing while the investor takes the loss on the vacancy.
4. Rental properties are expensive to run.
Especially when you have vacancies! Even when the place is vacant you still have mortgage payments, insurance, utilities, property taxes etc. This is why I think it’s important for prospective landlords to build up a war chest before buying a rental property. Luckily, I had enough cash flow from my job and other investments to cover the monthly expenses on my properties indefinitely. But many people who get into rental properties vastly underestimate carrying costs if the property is vacant for any extended period of time. I recommend having at least 6 months expenses as a reserve.
5. There’s lots of Maintenance on Rental Properties.
Roofs, windows, doors, flooring, walls, stairs, furnaces, appliances etc.etc. There’s always things going wrong with rental properties so be prepared to have a healthy maintenance budget. Forget about the 5% monthly maintenance costs. Plan for anywhere from 10-25%. One emergency call to a plumber will easily run you about $200. A furnace fix, at least $500.
6. Unforeseen Risks.
Severe weather can ruin an investment in real estate. Other than a handful of people in D.C., I think most people are aware that climate change is happening. The Pentagon, CIA, insurance companies and others are all planning for the effects of climate change. I think investors…particularly property investors, should do the same.
Flooding, tornadoes, wind storms, severe thunderstorms etc. All can cause serious damage to your property that may not be covered by your insurance. So beware. Luckily, I never experienced this, but crazy weather seems to be the norm these days and, for the property investor, these are some added risks that we need to take into consideration.
Is the area you’re considering buying in at risk of flooding? Does the city have updated sewer and storm drains? I’ll be honest, I never really thought about the impact severe weather could have on my property. The scary thing is that we are starting to see severe weather and flooding in places that never experienced it before. So I think property investors need to consider these added risks and plan for them by having adequate insurance protection.
Those are just some of the lessons I learned from owning rental properties. If I make another foray into owning investment property I’ll be sure to buy something local that I can directly oversee and manage myself. Even by taking a more hands-on approach there will still be lots of risks associated with rental properties so I’ll have to be prepared for them.
Thanks for reading my Rental Property Lessons Learned.
Photo Credit: Photo by Stuart Miles / FreeDigitalPhotos.net