Real estate investing lessons learned

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Real Estate Investing Lessons Learned
Real Estate Investing Lessons Learned

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.

ExpensesMonthlyAnnually
Mortgage payment$543.69$6,524.28
Insurance $125.00 $1,500.00
Taxes $200.58 $2,407.00
Gas $150.00 $1,800.00
Electricity $83.33 $1,000.00
Water $83.33 $1,000.00
Contingency/repairs @ 5% $112.50 $1,350.00
Default/vacancy @ 5% $112.50 $1,350.00
Expenses Gross $1,410.94 $16,931.28
Income
Rent – basement #1$600.00$7,200.00
Rent – main$750.00$9,000.00
Rend – 2nd$850.00$10,200.00
Laundry$50.00$600.00
Income Gross $2,250.00 $27,000.00
Net Income$839.06$10,068.72


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 lessons learned infographic
Real estate lessons learned infographic

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.

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8 COMMENTS

  1. I currently rent out two places. We own one free and clear but, since my father-in-law manages it, we let him keep all the rent. We’re perfectly fine with that. One day, we’ll sell the place and probably pay off our home mortgage or invest in the market (if it’s down in the slumps) because I’d much rather make 15 to 20% gains in a rising market than save from paying 4.25% in mortgage interest.

    I think it’s easy to get started in real estate IF we actually treat our homes as an investment and run the numbers before we buy. Unfortunately, 95% (arbitrary number) of the population buys as much home as they can afford so their homes are often horrible real estate investments that usually do not cash-flow when all expenses are factored in.

  2. This is extremely useful info. Although I am not a landlord myself, I am a homeowner; one thing I always emphasize when buying real estate is to look up public records on the property before making an offer. You can find out lots, including the permit history of the place, just by consulting the county and city websites.

    When I was househunting, I saw that one house I looked at had over 10 fines assesed for an ilegally high fence! I was glad to know in order to factor in the cost, aesthetics, and security considerations of fixing it before making any offer.

    • This is a very good point. In our search for a new personal property we found out that what we thought was a legal pool house conversion turned out to not be what we thought it was. It was enough for us to pull out of the purchase as we wanted to rent out the pool house as a second suite. Thanks for your feedback!

  3. Random I found my way here from Reddit. I would love to hear more. I have been buying, selling, and renting 1-bedrooms for a while with success. I am looking to learn more about increasing the number of units I own through financing. Did you hold title to your property in and LLC? Any recommendations on books or resources you learned from?

    • Welcome! We held our property personally, but I’m in Canada. Once we got going, we looked at moving them into a company for liability reasons but it was relatively expensive. If I was doing it over, I’d use a company for the liability protection and the tax advantages. No real recommendations on resources — we learned the hard way I’m afraid 🙁

  4. You mentioned you have sold your rental properties due to the rising real estate market. I’ve begun to do the same thing; however, I don’t know what to do with the proceeds. It seems to me that a lot of asset classes (i.e. stocks, real estate) are inflated. After selling your properties, what did you invest in?

    • We put some of it into my business (that failed) and the majority into our new principal residence. We still have a mortgage (well, it’s a line of credit), but we have a whole whack of equity.

      Unfortunately, where I live, there’s little in the way to avoid capital gains tax if you don’t hold the properties in a company 🙁

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