10 Things No One Tells You When Investing in Your First Rental Property
Buying your first rental property can be an exciting and scary process all at the same time. There is so much to consider when preparing to become a landlord that a lot of things can be overlooked.
Everyone wants to be rich and invest in a lot of properties like Grant Cardone or Barbara Corcoran. People want generational wealth and stay wealthy forever. However, you have to know what it means to be a landlord. To help understand everything that is involved, here is a list of some of the things that no one tells you about when you are buying your first rental property
10 Things You Need to Know about your First Rental Property
1. Know Your Costs
There are a lot of costs that need to be considered when you are getting ready to purchase a property. Unless you are paying with all cash, you will most likely have a mortgage. There are many costs associated with getting a mortgage and you will be expected to pay those costs at closing. Average closing costs are typically 2% to 6% of the loan amount.
You may be able to roll them into the loan, but you will also be paying interest on those costs for the entire length of the mortgage if you go that route. Additionally, you will also be responsible for paying the commissions for your real estate agent, which is typically 2.5-3% of the price of the property you are buying.
2. Rental Restrictions
Another thing to consider when buying your first rental property is if it is in a homeowner association. Some HOAs can have rental restrictions that could impact your plans of renting out the home. Two popular restrictions are rental caps and lease restrictions. Rental caps put a limit on the total number of houses in an HOA that can be rented at any specific time.
So, if the HOA is already at this limit, you may not be allowed to rent out your property. Lease restrictions require certain provisions that need to be included in a lease agreement. Minimum lease periods are a popular one, usually 30 days. This is to avoid short-term vacation rentals and high rental turnover.
3. Surprise Costs
When purchasing a rental property and becoming a landlord, you need to embrace the saying, “hope for the best but plan for the worst.” There will most likely be many surprise costs that pop up, and you will be expected to cover those. An increase in property taxes, regular property maintenance, unexpected repairs, and extended vacancies are all things that can and do happen. Having a plan in place to deal with unexpected expenses is a great way to avoid the headache and stress of having to deal with these issues when they come up.
4. Build a Reserve of Cash
Owning a rental property is not a “worry-free” investment. It is not like investing in stocks, where you just sit back and watch your investment grow. You will need a reserve of cash to deal with the unexpected costs that will come with home ownership. There are endless opportunities for things to go wrong.
Appliances will break and need to be replaced. Roofs will leak. Pipes and plumbing will fail. And all of these issues will need to be dealt with immediately so you will need some cash savings to be able to take care of them right away. Experts recommend saving between 10-20% of your profits each month until you have between $10,000 to $15,000 in reserve.
5. Know What It Means to be a Landlord
Becoming a landlord is a responsibility. Unless you are hiring a property manager, you will need to be available 24 hours a day to respond to the needs of your tenants. If there is an issue with the water, electricity, or heat, that will need to be dealt with immediately. Area housing codes outline the minimum responsibilities of landlords, so it is important to do your research and find out what those are. You may not be able to legally charge rent if you fail to meet those responsibilities.
6. Hiring a Property Manager
You may decide that you don’t want to be on call 24/7 and prefer to hire someone to manage your rental property for you. If you decide to go this route, you need to do your homework and ensure you are hiring the right person or company. The last thing you want is to have someone unreliable managing your investment as this will directly impact your tenants. Make sure to get references and reach out to other landlords who are using that property manager to get a clear picture of how well they manage the properties they oversee.
7. Tenant Expectations
As a landlord, you will come to learn that all tenants are different. Some will be easygoing, and some will be high-maintenance. It is your responsibility as a landlord to make sure that you are meeting the needs of your tenants if you want them to say. Unhappy tenants won’t be interested in renewing a lease when that time comes. While some issues may seem trivial to you, don’t assume that your tenant feels the same way. A happy tenant will make your life a lot easier as a landlord.
8. Not Everything is in Your Control
There are a lot of things to manage when owning a rental property, and you need to realize that not everything is in your control. Appliances have limited lifespans and will need replacing, sometimes at inopportune moments. Extreme weather can damage your rental and impact the lives of your tenants.
Tenants may have challenges pop up that may cause them to move out immediately and leave you with a vacant rental at the last minute. You need to be prepared to adapt and address these as they happen. Having an emergency plan in place and a stockpile of savings dedicated to your rental properties will help you deal with these uncontrollable events.
9. 2nd Month of Rent is Important
Typically the first month’s rent is paid with the deposit before a tenant moves in. It is the 2nd month’s rent that will show you how reliable your tenant is. Did they pay exactly on the due date or was it a few days late? Did they give an excuse for why they were short or late with the payment? These can be early indicators of how reliable (or unreliable) a tenant is. It is also a good idea to understand the eviction process in your state in case you ever need to go through that.
10. Wear & Tear is a Constant Battle
In between the maintenance emergencies that will pop up from time to time, there will be numerous wear and tear issues that will need constant vigilance. Property management companies will typically have a handyman on payroll to deal with the wear and tear, but if you are managing your property yourself you will either need to make yourself available to fix issues or hire a handyman to do it for you.
If you are going to hire someone to do it for you, make sure you properly vet them for peace of mind that things are getting repaired correctly. The last thing you want is an unhappy tenant because the same things break over and over due to poor repairs.
Happy Tenant is Your Main Goal
Owning a rental property can be a fantastic investment if managed correctly. Not only will the property itself increase in value over time, but having a renter in place will also generate a passive monthly income. But to ensure that your investment stays healthy, you need to keep your tenants happy.
Arguably, the largest responsibility of being a landlord is taking care of your tenants. Not only do you have a legal responsibility to provide a habitable living space, but if you want to make sure leases are renewed and your property doesn’t stay vacant, you need to make sure to keep them happy and give them a reason to stay. A healthy relationship between a landlord and tenant is the best way to protect your investment.
