That dream of living off “passive” income, however, takes a lot more work than you think.
You’re tired of your 9 to 5 grind and figure buying real estate and renting it out will be a low-stress way of making a living, so you can eventually quit your day job. Rest assured, there’s more to that story. Yes, real estate can indeed be very lucrative — the world’s supply is limited, after all.
Monthly rent checks are probably one reason you decided to get into the rental business. Collecting the rent is not as easy as walking to your mailbox on the first of the month. Though most renters are good at paying on time, it’s the inconsistent tenants that will cause you to gray prematurely. When the time comes, be ready to change your hat from the nice welcoming landlord to the merciless rent police. If you stay in business long enough, you’ll hear enough creative excuses to write a book.
How Hard Could It Be?
Any job is easy and enjoyable when things are running smoothly. But when the A/C goes out in August, a pipe burst in January or a tenant trashed the place before moving out, that’s when you will find out if you truly love your new job. All these things, and much more, will eventually happen. You need to be mentally and financially prepared to deal with them.
For example, replacing the section of a frozen pipe is no big deal and relatively inexpensive, any plumber can do that. With the service call, drive time, and the hourly rate, you should be able to get it for around $250. Remember though, a frozen pipe doesn’t leak. What if it thaws at noon when the tenant is at work? They come home to water spraying out from under the sink or in the basement laundry area.
The area is flooded, the carpeting is soaked, and it’s Friday evening. Now you’ve got a mess, water damage, you may have to replace the carpeting, or least hire a professional cleaner. Wait, there’s more. The plumber is charging double or triple time because it’s after hours and a weekend. Don’t be surprised if you’re flirting with $1500 when all is said and done.
Managing Problem Tenants
No matter how vigilant you are with tenant screening, sooner or later, someone will sneak through that can summon your Satan. You may have heard all the horror stories, but you say to yourself, “I wouldn’t let that happen to me.” Oh, don’t worry, it will.
It’s Time For You To Go!
Evictions get ugly, are time-consuming, and the bills add up quickly. First, you’re not collecting current rent due. Then there are court filing and attorney fees. Chances are the property is going to be a mess or worse yet, damaged. If the tenant left a bunch of stuff behind, you may have to pay to store it. Then, of course, you’re not able to rent to other tenants until you bring it up to standards. And finally, you have to find a new tenant. If you’re lucky, you’ll only lose two or three months’ rent. Including court costs, your final bill could easily hit $4000 to $6000.
What’s A Balance Sheet?
If you’re the kind of DIYer that doesn’t mind getting their hands dirty but hates numbers, sorry but you’re going to have to learn. Oh sure, you can “just pay someone else to do it,” but an accountant or CPA doesn’t come cheap. Even if you can afford to hire it out, you should at least become familiar with bookkeeping and the finances of your new venture. You expect complications with your tenants, you don’t want to get ripped off by some bookkeeper.
You Need To Be A Good Banker
Hopefully, your properties are fully occupied, and you’ve got plenty of cash flow to meet expenses, and you’re stashing some away. For most landlords, the reality isn’t so dreamy. That’s why you need to stay on top of finances and bank some cash.
Tenants come and go, but your fixed costs don’t go with them. You’ll have times when money is rolling in, and then you’ll face spurts of vacancy. It’s vital to put some money aside to keep as a reserve to get you through the dry times.
Property rentals can be very profitable, but as with any business, it’s not all peaches-n-cream. Real estate is not for everyone. There will times when you’re ready to sell the farm, followed by times that make your investment and hard work all worth it.