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What I Wish I Knew Before Buying Rental Property
In early 2006, my husband and I decided to purchase our first home in my hometown of Greenfield, Indiana. After shopping around for a few months, we decided on a 1,300 square feet home with three bedrooms, an open kitchen and living room, and a fenced back yard.
Since we had moved there from a one-bedroom apartment with only two windows and a total of 500 square feet, it felt like a mansion to us. All of a sudden, we went from sleeping, eating, and living in 2-3 rooms to having more rooms than we needed.
Still, our plan wasn’t to live there forever. You see, we had somehow set our sights on becoming landlords at a young age in order to reach our dream of financial independence as quickly as possible. And that’s exactly what we did.
A few months after the purchase of our own home, we put 10 percent down on a brick ranch nearby and turned it into our first rental. Shortly after that, we converted our “starter home” into a second rental and purchased a larger home for ourselves.
We learned most of what we knew about finding and screening tenants, creating and signing leases, and managing our properties on the Internet. Everyone we knew thought we were crazy, until they finally realized that, despite our lack of experience as landlords, we were, in fact, making it work somehow.
Here’s What I Wish I’d Have Known
Fast forward almost ten years, and our properties are still standing and as profitable as ever. One of our properties has been paid off for around a year, and the other one has a small mortgage that is set to be paid off in 2-3 years.
Of course, family members and friends who once thought we were crazy have changed their tune over the years. Once both our properties are paid off, we’ll have at least $2,000 per month in somewhat passive income on a monthly basis. All the while, our tenants actually paid off the properties with their money – not ours.
Still, it hasn’t been a painless experience, and we made many mistakes along the way. And there are plenty of things I would do differently if I could. Unfortunately, it’s true that some things need to be learned the hard way. Here’s what I wish I would have known before we became landlords:
Your Property Taxes Might Explode
One of the first lessons we learned about owning rentals came as a huge, scary surprise and ended with a night of tears and weeks of stress. I’ll never forget the day I opened our property tax bill for our first rental and realized that our property taxes had gone up 300 percent overnight.
I actually knew that our property taxes would go up somewhat — my state offers a homeowner’s exemption on your primary residence, and I knew that it wouldn’t apply to any properties we didn’t live in. Still, I was unaware that property tax caps on rental properties were a full percentage point higher than those on homesteads and your primary residence.
The problem was, I had based the rental price on our old mortgage bill – not the new one. So, for the first year we rented that home, we merely broke even instead of pulling in a profit. Fortunately, we were able to readjust the rent and raise it to take the higher property taxes into account once the first year’s rental lease came to an end. Lesson learned there, but it was definitely learned the hard way.
Renters Can Do More Damage Than You Realize
If you talk to anyone who has owned rental properties, you’ve likely heard a few horror stories about the kind of damage they can leave behind. I was fully aware that these things happen, but not quite prepared or expecting to live through it myself.
Unfortunately, I would soon find out how stressful it can be when one of our tenant families broke their month-to-month lease abruptly and moved out in the dead of winter. When I showed up at the house to do the final walk-through of the property, I honestly couldn’t believe what I saw.
All of the doors in the home were missing — gone. The carpet, which had been new when they moved in, looked as if someone had poured a giant can of motor oil all over it. The front door had been broken into and the door frame had been haphazardly glued back together in an attempt to hide it.
But the worst was yet to come. The giant picture window in the front of the house had been broken — and replaced with a window that didn’t even fit and didn’t match the rest of the windows in the house. What.
I couldn’t believe what I was seeing. The house had been in great shape the last time we visited, which was only eight months before. Unfortunately, I later found out that the mother of the family had packed her stuff up and left several months before, which left the father and kids to figure things out on their own. He worked long hours and left the two teenage boys alone during that time, which led to the total destruction of the home in a relatively short amount of time.
We ultimately fixed and replaced everything in the home, and even got the tenants to repay us for most of the damage. Still, I learned a valuable lesson from the experience: A lot of damage can happen in a short amount of time if you allow it to, and the only way to prevent it is to visit your properties frequently.
Good Tenants are Worth Their Weight In Gold
Spending $6,000 to repair our rental property taught us that we needed to be more careful when selecting tenants. However, it also taught us to appreciate the really good renters we have the pleasure of doing business with. You know the kind, and maybe you are one yourself: The renters who take immaculate care of the lawn and keep the home clean. The ones who decorate for the holidays and take pride in their rental as if it was their own home.
One of our homes has been rented to the same family for eight years at this point, for example, and I have grown to be very fond of them. We only drop in once every six months or so, and the property is always immaculate inside and out.
We hardly hear from these particular renters. The last time they called us it was because they want to stain and upgrade the deck.
Because they are such good tenants, I’ve pledged to never raise the rent as long as they are there. And, even though we’re losing out on some revenue by not raising rent, we get the peace of mind that comes with having a tenant that takes excellent care of our property. To me, that feeling is worth more than the incremental rent increases we could charge as time goes on.
I also wonder if we will end up ahead anyway. After all, excellent tenants like them tend to require fewer repairs and will leave far less wear and tear behind when they do finally move out.
Repairs Will Be Expensive and Unexpected
In the ten years we’ve owned our homes, we’ve replaced a furnace, an air conditioner, a refrigerator (twice), and a stove. We’ve paid for a new sump pump and underwater drain system in one of our crawl spaces. We’ve spent hundreds of dollars on drywall repair, paint, and carpet. And that doesn’t even include the $6,000 we spent repairing the property our renters practically destroyed one year.
Fortunately, most of those funds have come straight from our renters themselves. Since both of our properties bring in a tidy profit each month, we are able to use the overages to pay for things like repairs and upgrades and whatever else comes up.
Still, some of the money has come straight out of our own pockets, and those surprise repairs always seem to come at the most unexpected (and worst) times possible. When we first became landlords, we didn’t have a huge emergency fund to deal with unexpected repairs and would often need to dip into our personal savings to pay for anything that popped up.
Everything always worked out fine, but I definitely realized over time that we needed to set some funds aside for what we knew would eventually happen. And now that we have an emergency fund big enough to handle nearly anything, I no longer stress out about those things — like the roof that needs replaced in the next year or two, or the 17-year-old furnace that will eventually die.
Instead of letting the unknown control us, we’ve learned to take control of the situation ourselves over the years. Stuff happens. The difference is, now we’re prepared.
It’s Okay to Set Rules and Stick to Them
One of our tenant families was constantly five to 10 days late with their rent for two years straight. And even though the lease said I was technically allowed to charge a $10-per-day late fee, I never did. Not once. What happened? I was simply being too nice.
It all started with the first month they were late. It didn’t seem like a big deal to me, so I told them not to worry about it. “Just pay when you can,” I said. And that’s exactly what they did.
Unfortunately, they continued to pay when they could, every month after that. And because I had been so nonchalant about it those first few months, it became harder to put my foot down as time went on. I was also non-confrontational at first, which is almost the worst thing a landlord can be. As a result, they were late with their rent for two years and I spent countless hours stressing out over the situation.
I’ve learned since then that it’s okay to stick to the terms in the lease – even if those terms end up costing someone else money. In fact, setting firm ground rules is the best way to let tenants know that the rules matter, and that there are consequences for late rent payments, damages, or anything else.
Buying Rental Properties Was an Excellent Choice… For Us
Although we were far from experts when we got started, I strongly believe that buying rental properties is one of the best financial moves we have made. First of all, we bought our properties near the bottom of the market which means they have already increased tremendously in value. And second, we’ve secured a future income stream that is separate from all of our other retirement accounts and not necessarily subject to the same risks.
Although our properties do bring in a monthly profit, we currently use that money to pay for repairs and maintenance. Meanwhile, any overages go straight toward the loans in order to speed up their potential payoff dates. Our properties currently rent for a little under $2,000, but I do expect them to rent for significantly more in the next 10 years. Once they are paid off, all of that money is earmarked to help our girls pay for college and finance part of our early retirement dreams.
Further, because of our penchant for real estate, we do plan on buying at least two more rental properties in the coming years. While I’m not quite ready to pull the trigger yet, I think we could benefit from having a few more paid-off properties in our portfolio by the time we retire.
Becoming a Landlord is Not for the Feint of Heart
Buying the right rental properties is a challenge in itself, but the act of being a landlord is by far the hardest part. However, owning rental properties can be the key to a great deal of profit and financial freedom if you do things the right way from the start – or at least learn from your mistakes along the way.
I wouldn’t change anything about our story, but I do wish I had known more about the business before we got started. If you are considering buying rental property, I hope you can learn from my mistakes instead of learning things the hard way.
My best advice is this: Screen your tenants carefully and keep an eye on your property at all times. Don’t be afraid to lay down the law if needed, yet be respectful of your tenants and their families — especially the most reliable ones. Also, save for the repairs you know about… and for the ones you don’t.
Because, when it comes to being a landlord, anything that can happen probably will.
Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.
Have you ever considered becoming a landlord? If you’re a landlord already, what do you wish you would have done differently? Tell us in the comments.
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