Imagine: you relaxing on a Hawaiian beach sipping on your last Mai Thai for the night while watching the sunset over the crystal blue ocean. Next on the list is to go back to your fancy hotel and have a romantic night with a loved one. This night seriously could not get any better. Then you get a phone call from a tenant at your rental property… the water heater is out and needs to be replaced. Pretty much every landlord’s worst nightmare.
Dealing with tenant headaches keeps a lot of people out of the real estate business. Afterall, stocks and bonds will never call you in the middle of the night, destroy your property, or annoy you with little fixes that need to be done around the house. People just don’t want the hassle.
I have had two vastly different experiences with rental properties. One property I picked out and manage myself. The other is owned by a friend who is out of the country, so I help look after it for him. This property I did not get to chose and is managed by a property management company.
I think real estate is one of the best ways to build wealth. If you pick the location and tenants properly, it will be a walk in the park instead of turning your hairs gray.
NIGHTMARES EVERYONE HEARS ABOUT
The property I am helping look over is the nightmare people hear about. It really is the exact opposite of what I want in a property. It is far away (1.5 hours), it is pretty run down and needs constant maintenance, the tenants are picky, and the property management compnay is run by the devil…
The biggest problem I have is the property management company; I think he just picked a really bad company. They are constantly calling about fixes and tenant issues. If I have to hold their hand all the time, what is the point of even having a management company? What’s even worse is that I am pretty sure they are in cahoots with their maintenance affiliate and get kickbacks. So they are always telling me I need to repair stuff that is still in working order! And if I tell them no, they get extremely argumentative and are very unprofessional.
I would end the contract if it did not cost my friend so much… Just have to wait a few more months, find a new company, and hope it works out better. I would manage it myself if it wasn’t 1.5 hours away.
REAL ESTATE DAYDREAM
My other property is a dream come true: it is a newer house in a good location with good tenants who aren’t picky and only email if there is an actual problem. Since the house is newer, there has been no maintenance issues. The only time I have ever spent on this property was when I first bought it. It was a week’s worth of hard work and sweat getting the property cleaned and ready and finding a good tenant.
The checks keep rolling in and paying off the mortgage for me. There is even leftover money to help pay for all the maintenance and vacancies that I am not having! Life is simple and I’m making great money with a fantastic long term investment.
STEPS TO PICK THE PERFECT PROPERTY
The biggest issues I see with rental properties are people rushing into them because they found a ‘deal’ or are too impatient to wait for a real deal. It is important to find an undervalued property, so that the rent covers all your expenses and then some, but finding a property that will attract good tenants is even more important (if you don’t want a real estate migraine). Finding a property that won’t break on you is another important feature that will save you a lot of gray hairs.
Here are the 5 steps I follow when evaluating a rental property.
- Find a realtor who is experienced with finding foreclosures and short sales for investors like yourself. Ask him to look for houses that just popped up and have motivated sellers e.g. short sales. You pretty much have to be taking advantage of someone’s situation to find a good deal.
- The property must be a “deal”. Meaning the rent can pay for ALL expenses: mortgage, taxes, hoa, utilities, maintenance, and vacancies. Here is where I do my due diligence such as checking comparable properties to figure out how much rent I will actually get and looking into how much the expenses will cost me in the area. If the property will make enough income to be profitable, it is time to look a bit deeper.
- Now you look into the location even more. First it needs to be close to you! No one wants to drive an hour to check on their property. Next I look into what kind of people live in the area? If is it a class A neighborhood with a pride of ownership aura, then you will find good tenants but it will probably take longer since there will be more owners than renters in these neighborhoods. Mansions are pretty difficult to rent out. I like to look for 3 bed, 2 bath homes, renters seem to love them.
If you find a B class, blue collar kind of neighborhood located near a growing job center where you can still comfortably walk alone at night, you may have found a winner.
I avoid run down areas even if it’s just a little sketchy no matter how good the deal is. It is just not worth dealing with bad tenants who won’t take good care of your property.
I would much rather be patient in my search, even if it takes a while, to find a home in a nice area (not too nice, remember mansions are really hard to rent out) that is well taken care of.
- Now that you have found a good deal and an appropriate neighborhood, it is time to pounce on the deal. Did I mention you have to be REALLY fast when it comes to finding deals? Most of the good deals do not make it onto Trulia or Zillow. They have already accepted an offer by the time they get on those sites, so don’t waste your time. This is why you need an experienced agent to find them on the MLS (multiple listing service) or through word of mouth.
- Once you have a property, clean it up as fast as you can. Then be patient looking for a tenant. You really want to take your time and look for the right people, it will make your life so much easier; sometimes you will forget you even have a property that is making you a shit ton of cash!
But seriously, look for a person who has never been evicted, has a good stable job, and has a good personality. When showing the property, it should be fairly easy to tell. Are they asking a lot of picky questions? Are they keeping too quiet and you feel like they are hiding something? Try to find a person you could have a beer with. If you like the person and they are friendly, you won’t even mind late night calls near as much!
You will even improve your return on investment with good tenants. They will stay longer, assuming you treat them right, which leads to less vacancy and more money in your pocket. They might even take care of minor maintenance stuff for you; my tenants have been replacing light bulbs and cleaning cobwebs off the exterior without me even asking! I am so fond of them I probably won’t raise rent as long as they stay there. Unless they stay for ten years and my expenses go way up! Treat good tenants like family and you will be much more wealthy in the long run.
SIMPLIFYING YOUR LIFE
The whole purpose of investing is to grow your wealth enough so you either don’t have to work or so you can do whatever you want in life. The goal is definitely not to give yourself an early heart attack from stressful tenants and midnight repair calls. So follow these steps and simplify. No matter how good the deal may seem, it is not worth the stress if you won’t be able to get good tenants who take care of your place. Just take your time finding a good place and a good tenant.