Rental Properties
One way my husband and I make some money "on the side" is by owning rental properties. We have bought (and sold) a few in the last seven years, and I thought it might be useful to share some of the things we learned.
1) Never make an emotional decision when buying a rental property. Chances are you will not love your rental property. That’s okay - this is not your home…this is like any stock or bond. You need to make the decision to buy with your head, not your heart.
2) Before you make an offer, walk through the place with your contractor so you know what the place will cost you to repair and what you may have to fix/replace in the next few years.
3) Before you make an offer, create a spreadsheet that breaks down exactly what the place will cost you each year. Work on a “worst case” assumption. This includes the cost of the mortgage, repairs, maintenance, empty units, broken appliances, roofing every 10 years, etc… If you cannot get positive cash flow from the property each month, then do not buy.
4) Bargain hard for the purchase price of the place. Make barely acceptable offers. Be prepared to walk away. Be prepared to end up bargaining for several houses and to keep getting rejected because your offers are too low. That’s okay…you will find something eventually. You are not emotionally invested anyway, right?
5) Our experience has been that the more rental units in one place, the better. If you have a single-tenant apartment and the tenant is terrible, or the place is empty for several months, you have no income. With a house with several apartments, you are at least getting some cash flow even with a unit or two sitting empty. It is also much cheaper to buy one three-tenant home than three single-tenant properties…you essentially have almost the same cash flowing in each month, but at a much lower purchase price.
6) You need to set aside a lot of emergency money for each rental property. Assume that you will need 6 months of rent, in case you cannot get a tenant. Set aside a few thousand dollars for miscellaneous repairs. Or get a line of credit. You will need it.
7) Assume that you will get at least one call per month about an issue you have to address. Many people think that rental property is hands-free. It is not. If you do not have the time to address issues, you will need a property agent, and this eats into profit. If you want hands-free investments, rental units are not the way to go.
8) Look for a handy tenant. We have one tenant who basically manages our three-unit property for us. He takes care of any small jobs, and has a list of our contractors for any larger jobs. In return he gets a small break on the rent, use of the garage, and use of the backyard to grow produce.
This is getting long, so I will end here. Does anyone else have any tips they would pass on to someone looking to buy rental property?