Thinking About My First Rental Property, Advice?

[GnarShredd]

My soon-to-be wife and I have been talking for a while about getting a rental property and having our hand at that game. Any tips for us newbies as we look in to it?


Just had an interesting building open-up in our neighborhood and we might want to jump on it, but want to do our research first.

Short story is I own the house we live in now, been splitting mortgage/bills with my fiancee. She's been saving like crazy and has a good amount tucked-away for a solid down-payment. The building behind our house is just recently up for sale for (what I think is) a good price. 2-story building, 4 single units. Smallish spaces but similar apartments in the area are about $500-$600/month or so including water (roughly, still researching it).

She's a great sales person and I'm pretty handy with fixing things/landscaping. So fix-up shouldn't be a problem if there's only minor issues and she could probably sell the hell out of it.

[eeven73]

1.) People are pigs. Have no emotional attachment to rentals condition.

2.) Don't let people make you feel like they are doing you a favor by paying the rent. It needs to be ON TIME or GTFO.

Other than that it will all be gravy

[Bowen]

1. Think about putting it into an LLC It's not for everyone though and there are other ways to do it.
2. go by the 1% rule. If the place won't rent for at least 1% of the sales price, then it's probably not worth it from a cash flow perspective. (4 plexes like you are talking about are great for the individual investor because you can take out a single family loan on it).
3. Mr. Landlord has a lot of good information. Additionally http://www.fatwallet.com/forums/finance/59627/ has been an AWESOME source of information for me; I've pretty much read the whole thing, and while I"m still not a pro I learned a TON.

I just got into it myself. I formed an LLC with a group of guys and we are buying up properties, we have 10 so far.

[brew]

I'm in a group that owns about 120 doors and also owns a property management company that manages another 400 or so on top of the one's we own. Residential rental is a tough market, because as noted above people don't take care of stuff any more.

Make sure you get the best deal you can on the front end, put the money into fixing any major issues prior to ever putting a renter in it, and then be very selective on who you put into it. If the property presents well and is in good shape, you are more apt to get a decent renter that will take care of it and pay a little more for it. If it's in rough condition, you end up getting lower quality renters that think you don't value the place so they don't either.

Make sure you are comfortable covering all the expenses with no renter before you buy a property and that you can also handle major expenses if they come up. Something will go wrong, there will be a month at some point where you have to cover everything, etc. Make sure you can do it before you buy. You don't want one bad month or one major repair to put you in a bind that cause other problems.

Also, as noted above pay the rent on time or GTFO. Once you let someone get on the slippery slope of paying late, it never works out to your benefit.

There is generally no benefit to putting rental property into an LLC over a GP. You can insure against liability concerns which is the only benefit to the LLC. A lot of states tax LLC's differently than GP's, so you would need to consult with someone local to see the tax implications / drawbacks of each.

Also, I would not want to own rental property anywhere near where I live. It gives your tenants too much access to you. I know plenty of people that own duplexes and live in one side and rent the other, so it works for them though.

[GnarShredd]

Thanks. It's all really helpful. I knew a few of you guys had experience.

[RampageWake]

It's not for everyone. If I could make 12% on my capital elsewhere I damn sure wouldn't be a landlord anymore. Unfortunately, my RE has outperformed my other investments by far, but it can be a PITA at times. 4 units should be a piece of cake though. You make your money when you buy, as others have mentioned.

[GnarShredd]

I think we're going to give them a call and take a look at the place. Haven't talked to a realtor yet but I think it's a Short Sale so that might explain the almost "too good to be true" price I saw it listed at. Hopefully it's in good condition, if it is I think we'd easily get our investment back and then some if we wanted out.

[brew]

One other piece of advice, the type of property you buy dictates the renter you will get. If you buy junk, you will get a crappy renter. If you buy property that is closer to the standard of what you would live in, you tend to get better quality renters. The returns tend to be smaller because the gap between the purchase price and the market rental value is less, but the risk is substantially lower.

[jason_ssr]

I've been tempted by this many times. However, I known several friends who tried it. They are all very smart professional people who are very organized, well funded, and motivated people. Not ONE of them had a positive experience (granted they were all rookies). They just decided to put the money elsewhere.

The way the market has been, I would just stick the cash in a CMA account and throw darts at a pegboard covered in stocks and start buying. I'm not the most savvy investor but this year has been off the charts for me.

[vette74]

I did it once. I bought the house right in an up and coming part of Houston. It was a strange lot with a street on the front and back and the house had 2 kitchens. So I turned it into a duplex. Fixed it up had people move in made a few house calls to fix things no big deal.
One renter always paid late or only half whatever charged him extra he bitched I gave him a letter saying you have 3 days to pay or we are evicting you it is not personal just business. He got his crap together and paid. The other tenant and him were friends then not and wanted to use me as a mediator I told them to call the cops and hash it out.
Anyway market went up both of their contracts were up kicked them both out repaired the house made it back to a single family and sold it made a small pile of cash. Then started a chiropractic office and an engineering firm and never looked back.

[Partyb]

A lot of good advice above, the high points summarized by Brew. As a RE attorney and LL:
1. Most LL's have a hard time first b/c they do not treat it as a business. They listen to the T's line of BS, the rent gets behind, then two months, now yer farked. Remember: YOUR family is more important then their family. Don't get emotionally attached and start fighting with your wife b/c the rent is late.
2. YES, if rent not paid on time you MUST start eviction proceeding process ASAP.
3. Plan for at least 10% lost rent, and 10% repairs. If you have to get a new tenant even every two years, that is at least one months lost rent, plus repairs at a mininum including painting.
4. Regards what people said about whom to rent to, I've found it's a trade off. Crappier places and/or multi families you will make more on rent. With a more upscale single family you will likely make more money on appreciation.
5. I personally like that your place is close, makes it easier to run over and fix things. I have a 6 family about 3 miles away, it would be in ruins I'm sure if it was 10 miles away. I am lazier then you probably though.

[brew]

Here is another piece of advice:

If you're generally gullible, feel bad for the less fortunate, make decisions with your heart over your head / back pocket etc. then stay out of low end rentals. The people you will be dealing with know the system and know how to play you and the system to their benefit. Pay a management company to place tenants and collect rent if you still insist on buying a low end rental.

We have a lot of owners that get taken advantage of by renters because they feel bad for people. This isn't a nonprofit, it's a business/investment and has to be treated accordingly.

[GnarShredd]

Noticing a common theme. My fiancee and I are not the types to take BS from anyone, especially when it comes to our money. Both our jobs have trained us well in that regard too. We're both on-board with starting eviction quickly if we don't get paid.

We don't expect it to be too low-end. It's a little small, but that's common locally where people seem to be happy trading off space for living in a cool area of town. Lots of restaurants, arts, and bars are starting to open up just a few blocks away, it's becoming a really desirable place to live. We're not planning to make a ton on the rent, we'd be going in to it more for the resale investment.


I got a hold of the realtor selling the place. Apparently it's already under contract (got snapped-up quick!). They're going to give me a call if anything similar opens up in the neighborhood or if something falls-through with the current bank/buyer.

[pyrocasto]

If I rent in a few years I'm going with a local rental company. They do all collections, evictions, money handling, repair work, etc... Their cut is 10% which I think is well worth it. I wont even have to see the house as long as people are living there.

[brew]

If you are going to buy a decent property with decent rents, I would look for someone that does it on a flat fee basis. We manage under both scenarios and on the nicer properties we love someone to take the 10% deal over the flat fee. They don't typically take much work from the property management side and generally stay rented. If you're looking at a rougher property with lower rents, then go with a percentage deal because it will generally work out better for you as an owner.

[pyrocasto]

I'll do some shopping around first then, thanks for the tip. Havent put much thought into it yet since it's still maybe 5 years away.

I had already asked a guestimate what they think my house would rent for. In this economy, right now, between 1600-2000. Mortgage is 1000 right now.