Considering investment property ownership? Here are a few tips.
When I left the world of running large data centers to manage properties, I thought the transition would be relatively simple. My partners for my new adventure already owned 200 residential “doors” and 140,000 square feet of commercial space so they had critical mass. Answering tenant calls, I thought, would be just like running an information technology Help Desk – something I knew how to do. But there is always room to learn, and learn I did. Over the next several years, I managed as many as 600 rental units. The most important thing I learned is that most tenants are nice people who need a place to live for a fair rent. A few bad experiences, though, can sour a new landlord, and that is why I offer some suggestions here for anyone considering buying investment property and entering into Life as a Landlord.
- Know your tenants. Always meet your tenants and set expectations around landlord and tenant responsibilities. Check your prospective tenants’ credit using resources like com or other automated resident screening software.
- It takes time to sustain profitability in a property. Whenever you buy an investment property, a period of stabilization is required. Keep up with the property maintenance. It is far less expensive over the long run to maintain a property than it is to repair a property. Arthur Deych, Broker/Owner of Red Tree Real Estate said, “Take a property in need of mostly cosmetic renovation and give yourself at least a year or so to raise the rents to the level required to make it a ‘successful investment.’ Investment property takes time to cultivate the right renovation, the right tenants and the right rents.”
And when tenants see that the landlord cares, they will generally take better care of the property.
- Collect your rents. This may seem obvious, and it should be. But some people look at rent as optional if they are in a pinch. Let me tell you, there is nothing more frustrating than paying a mortgage on a building where the tenant(s) are not paying their rent.
There are many excuses for not paying rent. “My car broke down,” “I needed to see the doctor and couldn’t work,” and “My check is late” are just some of the rationale tenants have shared. The truth is, you need to draw a hard line. Your bank isn’t going to be understanding if you can’t pay the mortgage.
- Keep utilities separate. Whenever possible, keep the utilities (water, electric and gas) separate. Often, buildings have varying degrees of separation such as a single water bill and separate electric. Most water bills are predictable, and if you see a wild swing you can immediately find that leaking toilet in the building.
It is important, I found, to keep the heat separated. There is little more frustrating than arriving at a building where you (as the landlord) are paying for heat and see the indoor temperature being regulated by open windows. By having your tenants pay for heat, the costs will be self-regulating.
- Know your property. Real estate is about knowing your numbers, and understanding ratios of income to expenses on various elements. Run your numbers and consider many “what if” scenarios.
- Expect surprises. Issues happen (floods, power issues, leaks). They need to be responded to appropriately (a “no heat” call in the dead of winter, for example, needs attention). Consider whether you have the correct insurance, manpower and funding available to cover emergencies.
To learn more about financing and owning investment property, contact Phil Purcell, Hanscom FCU Vice President of Commercial Lending. For answers to commonly asked questions about investment properties, download our free Investment Property Ownership eGuide.
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