One side gig I have a lot of experience with is being a landlord on a small scale. I started with a small condo, and worked my way up to triplexes. You can benefit from my real estate investing lessons learned!
Rental property is a big market. According to this Harvard report, 43 million households in the United States were renters. There’s a lot of opportunity to make money here.
I made a lot of mistakes along the way, but did manage to amass around $800k at the end of the day. Even though that was amassed over a period of 7 years, this side gig’s income exceeded many people’s day job’s.
I’m going to share some of the things I learned doing this so you don’t make the same mistakes should you want to become a landlord.
Real Estate Investing Lessons Learned #1: Do A Financial Forecast Before Jumping In
Probably the biggest single mistake anyone can make before becoming a landlord is not to do a realistic financial forecast. It’s not enough to say “rent minus mortgage + utilities is profit”.
Cashflow is king in my book and losing money every month on a rental property in the hope’s you’ll some day make it back when you sell it isn’t a smart financial move in my book.
Below is the financial forecast for one of our properties. You’ll note we were smart and included an amount for repairs at 5% a month and an amount for default and vacancy at 5%/month. Where we weren’t smart is actually setting this money aside in a separate account every month.
|Contingency/repairs @ 5%||$112.50||$1,350.00|
|Default/vacancy @ 5%||$112.50||$1,350.00|
|Rent – basement #1||$600.00||$7,200.00|
|Rent – main||$750.00||$9,000.00|
|Rend – 2nd||$850.00||$10,200.00|
Once you’ve done a financial forecast, you can also use it to reverse engineer a rent. For example, if the expenses total $24,000/year you know you need to charge at least $2000/month in rent. If the market will only bear $1500/month in rent, you know you’re looking at the wrong property.
Real Estate Investing Lessons Learned #2: Keep A Capital Expenses Fund Going
We needed two new roofs at once. Ouch. Expensive. But we hadn’t saved enough from our rent cashflow to do that. One of the roofs started leaking as well, which cost $1200 in emergency fixes and still required a new roof. Luckily we sold the two properties with the roofs the way they were.
A capital expenses fund, i.e. major things like replacing a roof or appliances, should be part of your financial plan from day 1. You should write down what you realistically expect to spend over the time you’ll hold the property. For example, in the 7 years we were landlords we’ve had to do the following:
- Replace appliances ($500)
- Emergency roof repairs ($1200)
- Install a dry-proofing system ($12,000)
- Replace a furnace ($5000)
- New flooring in several units ($1500)
- Bathroom renovation ($1500)
If we add up the total cost of this, we can see that over 83 months we should have been putting away $200/month for these. Of course you can’t forecast everything, but you’ll also find that not everything you forecast happens and your balance will likely more-or-less balance. It’s a lot safer to be putting away $200/month than nothing!
You will also notice that this figure of $200/month is awfully close to the financial forecast.
Note that this isn’t the same budget as small repairs. Small repairs (a bit of plumbing, fixing a hole in drywall) tend to be expensed rather than capitalized and directly come out of your monthly cashflow. This is another pitfall you should be aware of.
Real Estate Investing Lessons Learned #3: Turn Around A Rental Unit As Quickly As Possible
Don’t leave a rental unit vacant for months whilst you do renovation work or try to find time to show it. You’re leaving money on the table whilst it’s empty.
Open houses are a great way to quickly rent a unit. In our case, all of our rental units were a fair drive away, so the open house approach was our only option. Be sure to have plenty of application forms and ask folk to bring a copy of their credit check with them!
Renting a unit when it’s occupied can be a challenge, especially if the tenant isn’t the best housekeeper. Sometimes you just have to wait until it’s empty.
For predominantly “B market units like the ones we had, classified ads were king for renting. For “A” units, sometimes it’s worth hiring a real estate agent. They generally take between 50% and 100% of the first month’s rent, however.
Real Estate Investing Lessons Learned #4: Hire Trades Rather Than Do It Yourself
It seems counterintuitive, but doing work yourself isn’t always cheaper.
We had a basement apartment at one building that I wanted to renovate myself to save money. It sat empty for years in a half finished state. At $600/month in rent, that would have been $7200/year in gross rent – we could have paid for it to be finished and recouped the money it cost in less than a year. But we wanted to “save money….”.
Real Estate Lessons Learned #5: Raise The Rent
Raise the rent when you’re allowed to or it makes sense. Costs are always increasing; don’t leave money on the table.
Where I live, the amount you’re allowed to raise the rent by is legislated. But it’s roughly linked to the Consumer Price Index. Remember, if you’re not raising the rent by roughly the CPI or inflation, you’re effectively discounting the cost of the apartment or house year over year.
If you were to rent in 2015 at $1000/month and didn’t raise the rent in 2016 and 2017 at the rate of inflation, you’d be leaving $25.16 on the table every month. It might not sound like a lot, but that’s $300 over the year and enough to make a dent in your capital fu
Real Estate Investing Lessons Learned #6: Make Sure You Get Paid On Time
Where we live, if rent isn’t paid by midnight of the day it’s due, it’s an offense. We were never overly heavy about enforcing this with tenants who were tardy. The problem is that you’re effectively subsidizing their living costs doing this.
The other risk is if you let it go until the next rent cheque is due, they invariably don’t have the funds to pay the past due rent and the new rent and the cycle continues.
Closing Words On Real Estate Investing Lessons Learned
I’ve now sold all of my rental property. Where I live, the real estate market has had steady gains for nearly a decade and we’re likely at the “top of the market”. I’ll stay on the side lines until I see a new opportunity.
Being a landlord is tough. There are many seminars that make it sound like an instant road to riches. It can definitely pay dividends, but it is a second job and not passive income unless you get a property manager (which means another monthly expense, and one that’s generally quite hefty).
Hopefully you can learn from some of my mistakes and judge for yourself whether this is something you want to explore or not! Please let me know your thoughts in the comments.