If you want to learn about rental real estate, you will find success stories about owning rental real estate on any online search or watching late night television. The people will talk about how it’s safer than investing in the stock market and how it is the only way to become wealthy. It shouldn’t surprise you that most are saying this. After all, they are trying to sell you their guide or product that will help you in your real estate journey to financial freedom. I am here to tell you the other side of rental real estate.
My Rental Background
Growing up, my grandfather owned a rental property. I saw him getting a monthly check for $1,000 and knew this was something I wanted to do. Fast forward to 2007 and I bought my first house. I bought at the peak of the housing bubble and ended up being underwater.
In 2012 I met a great woman and in 2013 we married. We ended up moving into her house and since my house was still underwater, I decided to dive into rental real estate since it was an easy way to get my foot in the door.
It took me some time to find a good tenant, but I did find a great woman. In the first year, I never had an issue with her. She kept the place clean and paid her rent on time. At the end of her lease, she renewed for another year.
During the second year, troubled began. She started to be late on her rent. In her defense, she did send me two checks for the full amount, plus a late fee, it was just that I could cash one at the beginning of the month and the other around the 20th.
This went on for a few months, and then I got the call that she had to break the lease because she couldn’t afford the rent. I worked with her to get her out of the lease early, then did a thorough cleaning and put it back up for rent. But it sat empty for 2 months before I found new tenants.
Things To Be Aware Of
While the infomercials and the websites tout the benefits of rental properties, they often gloss over the downsides. Here are some of the downsides that you have to take into account, otherwise you are going to find yourself in trouble.
Finding A Good Home Is Hard: Most times you won’t just open the newspaper or jump online and find a property that is going to bring you money every month. They are rarer than most people think. In addition to this, there are many other people out there that are doing the same thing as you, so you have to act fast if you want a shot at buying the property.
You Have To Account For Vacancy: I see it all the time where new landlords think they found a great place and show me their numbers. When I ask about vacancies, they look at me puzzled. You have to account for your rental being vacant. Ideally this will never be the case, but in reality it will. You might not run into the situation I did, but your rental will be vacant in most cases after the old tenant moved out and you prep it for a new tenant. When doing your calculations, be certain to subtract a few months rent in a given year.
Things Will Break: Remember, this is a house and things will break. For me, it was the fridge. I wasn’t planning on buying a new fridge since the one in the house was only 4 years old, but I had to do it. That $200 hurt. Everything has a useful life. An air conditioning unit typically lasts between 7-10 years and replacing it can run you upwards of $10,000. There goes a few years worth of profits.
Things Will Need Repair: Along the same lines as above, things will need to be repaired. Walls will need to be patched and painted. These all cost money. Again, add in this expense to your calculations.
Going In With Your Bases Covered
If you did all of your homework, your calculations showing a monthly profit should be accurate. Most new landlords run into issues because they skip out on the information above and see they will be making $200 a month. After a few months of not having the money they thought they would, they realize the rental house is not profitable after all. Take the time to do all of your research and to account for everything. You might not think you will encounter this or that, but it is better to be prepared for it than not.