“Being a landlord is super easy,'' they say.
“All you have to do is buy an investment property and start collecting the rent check,” they say.
“Landlording is also all about fixing leaky toilets in the middle of the night,” they say.
Are “they” right? Not even close.
I find that being a landlord is a bit more like being a CEO than it is a plumber or dorm room RA. That’s because I use professional property managers on all of my properties and delegate tasks, rather than do them myself. My role is to oversee operations and ensure good decisions are being made.
What comes to mind when you hear the word “landlord”? I always think about a guy in medieval times telling the peasants that their taxes are due for their farms (very Monty Python and The Holy Grail-esque).
This probably isn’t something that many of us aspire to be. So let’s first set things straight about the realities of being a landlord, and then we can work together to change public perception.
First off, I’ll share a bit about my personal experience as a landlord. Then we’ll debunk a few of the biggest myths vs. truths surrounding landlording. Finally, I’ll leave you with four of the most common mistakes new landlords make, with the hope that you’ll be able to avoid all of them.
We’ve all heard the horror stories that come from owning rental property. I’ll touch on that in this article as well, but I want to get one thing out of the way upfront: I’ve lived it and it’s worth it.
My First Experience with Real Estate: A Disaster
As soon as I purchased my first single-family rental and the first rent check showed up in my bank account, I thought I was a genius! I thought I had figured out this real estate investing thing that everyone was talking about.
Things went smoothly for a while until the renter decided to move out at the end of the lease agreement and trash the house on the way out. They did about $8,000 in damage, but their security deposit was only $2,000.
My property manager and I took them to small claims court for the excessive intentional damage. We won the judgement, but then had the daunting task of trying to collect payment. That proved to be a nightmare.
Long story short, we were able to recover some of the money awarded to us, but not all of it (only around $1,800). While this obviously left a hole in my wallet, there were numerous takeaways and lessons that came from that experience.
That has been my worst experience with real estate investing by far and it happened to me on my very first deal. Yet here I stand, stronger and more confident than ever.
Fortunately, I still had a W-2 job and some savings at the time that I first got involved in investing in real estate, so I was able to weather the storm of repairs and expenses. I felt that this was hopefully going to be a one-time experience.
Both my property manager and I walked away from the situation knowing we had to more-thoroughly conduct screenings of potential tenants (i.e. background checks, credit checks, prior rental history) on the next go-round. Since this painful start to my investing career, it’s been nothing but smooth sailing with that property now that I have good tenants in place.
Myths and Truths of Real Estate Investing
There are obviously a lot of people out there with opinions, both positive and negative, regarding what being a landlord is all about. Let’s jump into some of the most common myths and truths.
Myth #1 - Property ownership is as easy as collecting rent checks.
Real estate can provide passive cash flow in the form of rental income, but usually only after a lot of initial legwork has been done, with systems set up to ensure smooth operation.
I’ve found that once I get into the groove of working with my team (agent, property management company, and contractor), things go quite smoothly. At first, however, we’re all learning how to play well together in the sandbox.
Myth #2 - Property ownership is only for people who want to fix toilets in the middle of the night.
Some real estate owners surely have had this experience … but only if they self-manage. Hiring professional property managers to deal with the day-to-day (and day-to-night) operation of the property is one of the smartest things I’ve done. I’ve never once had to fix a toilet in my 8+ years as a “landlord.”
I’ve also never met a single one of my tenants face-to-face. It’s not because I’m scared -- it’s because I treat my business like a business and leave the heavy lifting to those best equipped to handle it.
Myth #3 - It takes a ton of money to be able to invest in real estate.
It does often take some money down to get started, but it’s not as much as you might think.
Guess what the minimum down payment on a $50,000 house is? $10,000. Could you save an extra $10,000 in two or three years to start investing? If so, you can invest in real estate.
There are also ways to get started in real estate investing with low or no money down, but that’s beyond the scope of this post.
Myth #4 - Real estate is only for rich people who are greedy.
I would argue that the opposite is true -- real estate investing is for anyone who wants to give back to the community.
Would a greedy person provide housing for the community?
Would a greedy person pay thousands of dollars a year in property taxes so that local schools and projects can be funded?
Truth #1 - Real estate investing is hard.
Real estate investing can be hard, but it’s not difficult. There’s a reason that you’re reading this blog post … if real estate investing was easy, everyone would do it and everyone would be wealthy.
Just like with anything that’s new to you, REI will come with some challenges and a learning curve in the beginning. If we never did anything that was hard, we’d all still be crawling around on our hands and knees and be illiterate.
Truth #2 – It usually takes some money to invest in real estate.
Some people can actually invest with no money into a deal, but that is typically the exception and not the rule. After all, should real estate investing be free?
If banks and lenders gave out money to anyone who asked for it, without the borrower having any skin in the game, that would make for a troubled economy *cough, cough, just like 2008 cough, cough*.
Truth #3 - Owning real estate will add some stress to your life
Life as a landlord brings good days and bad days. The bad days will be frustrating and the good days will be exhilarating.
Stress can be managed with learned behaviors and remembering that no matter what happens, it’s typically not the end of the world. Take a deep breath and respond, knowing you’ll get through any small bumps on the path to your ultimate goal.
Four Common Mistakes New Investors Make
Real estate investing isn’t always a walk in the park, but it has proven to be one of the best wealth generators available. There are some very common mistakes made by new landlords and real estate investors -- most notably in miscalculating the numbers.
Here are the four most common mistakes I see new investors make, and how to overcome them:
1. The first mistake I see among new landlords is getting the numbers wrong by being overly optimistic in projections. You’ll want to ensure that the numbers used in your ROI calculations are conservative. Make sure to overestimate expenses and underestimate rents.
2. Another major issue that I see with newer landlords is that they incorrectly assume that property taxes will remain the same after the sale of a property. Property taxes work differently in each county and within each city – ensure that you fully understand what the after-sale tax bill will be.
The best way to do this is to simply call the county assessor’s office in the area in which you plan to purchase and ask the assessor how property taxes are calculated.
3. The third major killer of new landlords that I see is they inaccurately account for vacancy or they don’t account for it at all. That’s crazy!
If you are a landlord, at some point you will have a vacant unit or property. This is inevitable. You will have a vacancy at some point in your landlording career.
Vacancies are typically not a massive surprise if they are baked into your upfront calculations. Shorter vacancies are great, obviously, but make sure you can withstand a slightly extended vacancy without it sinking your ship.4. The final mistake I see new investors make: ignoring the importance of relationships.
Landlording and real estate investing is a relationship-centric, people-based business. It is difficult to get anything done in the real estate world by operating in a silo. Here are just a few people involved in your immediate real estate circle:
- Property managers
- Insurance agents
The more relationship-focused you can become, the easier being a landlord will be for you.
My Key Takeaways
To wrap things up, here’s a “Pro Tip” I’ll share with everyone who is considering whether being a landlord is right for you:
Prior to finalizing a deal, ensure you run your numbers and estimates by an experienced real estate investor or property manager. If your numbers are incorrect, you may accidentally buy a money pit. This is the #1 way new landlords lose money.
- Don’t be fooled into thinking investing in real estate is so easy that it requires no effort on your part.
- Also don’t be fooled that you need to plunge toilets every time a tenant clogs one.
- There is a middle ground and, with so many different real estate strategies, there is bound to be something that interests you and plays to your skillset and personality.
- Keep educating yourself about the Do’s and Dont’s of real estate so you can learn from the experiences of other landlords.