8 Issues with Investing in Rental Property and Becoming a Landlord

Perhaps owning multiple rental properties from which you can earn a monthly stream of income? Ah, the life...you never have to work again. You’re out of the rat race and into the fast lane of life.

But before you contact your real estate agent consider what’s really involved...

Though the proposition may sound simple it’s anything but. The information that follows details the downsides to property management so you can get a real prospective of the ugly side of investing in rental property.

I’m not trying to be negative or meant to dissuade you from investing in rental property, because I own a few hundred rental properties.

Instead, this is to show you that there are downsides as well as advantages to buying and managing rental property.

Don’t let your dream of real estate riches cloud your vision when considering whether or not you’re cut out for it.

1). Start Up Capital:

All new investors considering investing in rental property think about the cost of purchasing, but many times they overlook the costs to remodel, lease up, and paying for cost while your property sits vacant not earning any money.

In other words, don’t expect start-up costs to end at the closing.

If you buy a, bank owned property a foreclosure or a property at trustee sale it will most likely have a lot of damage or the property might be out-of-date because it’s very old.

These homes will require you to spend a significant amount of money to make rent ready.

Any damage to the foundation, plumbing, or wiring can cost thousands of dollars to repair. But even if you buy a property in good condition you may still have to make changes to get it up to code with the county or the HOA.

Check with your sates, county or city offices because they may have strict requirements for rental properties that you might need to meet before you start renting.

I strongly recommend you hire a licensed home inspector to determine what is wrong with the property before you close.

In addition to remodeling the property and making up grades for not being in compliance with these standards, start-up costs can significantly increase when you're investing in rental property.

For example, let’s say you purchase a recently built foreclosure that was previously occupied by tenants but the previous owner ended up going to foreclosure and you bought the property from the bank.

Your home inspector shows you a report and tells you that you're required to add safety features to the property before your new tenants move in.

The home inspector gives you a breakdown of the required additional repairs as follows:

• Handrails installed along the front and back entrance: $1,500

• Front and back doors replaced with secured, reinforced steel doorways: $400

• Peep hole installed in front door: $45

• Deadbolt entry installed on front and back doors: $75

• Standard dividing wall replaced with a fire wall: $1,800

• Completed code inspection: $35

• Rebuilding back year block was because of cracking: $900

Total Cost: $4,755 and this is on top of your rehab cost budgeted for $25,000. This puts you 19% over budget and you haven’t even started the rehab yet.

2). Making Repairs:

When it comes to investing in rental property and being a landlord repairs are inevitable.

Don’t even consider investing in rental property unless you’re sure that you can pay for repairs. Landlord and tenant laws require that you make serious repairs quickly.

If you don’t, you could be held liable for additional damages or compensation for the tenant if the authorities decide your property is not suitable to house your tenants.

The thing about repairs is they creep up on you suddenly and often cost a lot. It is up to you to make sure you have a network of contractors, handymen and people you can call on when you need work done for a reasonable rate.

Be proactive, and have a repair fund that you add to regularly.

For example, let’s say your tenant calls at 12:30 am at night as they usually do to tell you the water heater has busted and is flooding the house.

You have one of two options:
1). Pick up the yellow pages and call a company to immediately send an emergency repairman to shut off the water and dry out the carpet.

2). Call a handyman you’ve built a relationship with to go to the house and shut off the water and dry out the carpet.

Which do you think will cost less?

Since you called a company from the yellow pages and because it’s after hours you’ll most likely be charged $100 an hour for each of the two hours the repair man is there plus a travel of $50-$75. On top of that, you’re informed that you need to replace the water heater.

Since this is a repair that needs to happen as soon as possible, you head to Home Depot and buy the most reasonably priced water heater you see.

Not only do you have to pay for delivery and installation, but the company might not haul away your old, broken water heater. Luckily, your repair guy offers to remove it as long as you pay him his hourly rate and cover the dump fees.

Here is the total cost for this single repair:

• Emergency repair (2 hours @ $100 per hour): $200

• Cost to purchase a new 50 gallon water heater: $599

• Cost of delivery and installation: $359 at Home Depot

• Cost of removal and haul-away of the old water heater (2 hours @ the standard rate of $50): $100 + $50 dump fee = $150

Total Cost: $1,300

Here is what I would do...

Because the handyman does not have the overhead of a company his hourly rate is $20 per hour and he does not charge you a travel fee because he knows you will call him back to do other repairs.

He drives to Home Depot to buy the hot water tank in his truck and delivers the tank for $25. When all the work is done he takes the tank and disposes it for you for a fee of $25.

Here is the total cost for this single repair:

• Emergency repair (2 hours @ $20 per hour): $40

• Cost to purchase a new 50 gallon water heater: $599

• Cost of delivery and installation: $80

• Cost of removal and haul-away of the old water heater (flat fee) $25

• Total Cost: $744

Option 1) was $1,300 for the same repair.

This is the difference between being a being a passive landlord and an active landlord.

Major problems aren’t the only issues you’ll have to account for investing in rental property. Some tenants will call you for little things. Be prepared to spend your free time changing light bulbs, replacing air filters, weeding yards, and oiling squeaky hinges.

3). Collecting Rent:

You’ll have great tenants who pay the rent on time every month as long as you train them to pay their rent on the first.

You’ll have good tenants who slip up from time to time but always let you know ahead of time when to expect the rent as long as you teach them to notify you if the rent is going to be late.

If you don’t train them you’ll have the tenants that don’t pay and don’t call.

Investing in rental property almost guarantees you’re going to have to play bill collector from time to time if you let your tenant do whatever they want.

Ask yourself if you’re comfortable with confrontation?

From time to time you will have to confront your tenants so think about that before you start investing in rental property. Keep in mind that you’ll have to make judgment calls as a landlord.

I had a tenant who had been living in one of my rental properties for over six months and last month he didn’t pay the rent. I don’t hear from him for a week and it looked like he was not living in the property.

Finally, I hear form the tenant's brother who tells me the tenant is in the hospital. The tenant finally calls and says he cannot pay the rent because he's been in the hospital sick and has not been working.

He tells me he will pay me over time the rent he owes. You’ll have to make a choice to either let the tenant slide or to start the eviction process.

Make sure you’re comfortable making this kind of decision and sticking to it.

What would you do?

I told the tenant that he had to pay his rent. I also told him that if he did not have his rent paid by a specific day I had no choice but to start the eviction process.

You provide a service, a nice clean place to live and your customer, your tenant has to pay for that service. You can’t let your tenant trap you into letting him live rent free in your rental property.

What happens if you stay in a hotel and you can’t pay for your room? That's right...security will escort you out the front lobby door and off the property.

The hotel will not accept your sob story about how you were robbed the night before and now you don’t have money to pay for you room. You shouldn’t either.

• Watch this Video: Becoming a Landlord

4). Dealing with Problem Tenants:

Most of your tenants will pay their rent on time, treat the property like it’s their own, and keep the neighbors happy. But at some point investing in rental property, you’ll inevitably have a problem with a tenant.

As an owner of rental properties for almost 25 years, I’ve seen my fair share of problem tenants.

I once agreed to rent a property to a nice family. Everything was great for about four months but suddenly the problems started creeping up.

I started getting calls from the neighbors, they started having issues paying their rent on time until one month they didn’t pay their rent altogether. I went to the house to talk to them.

When I arrived I found a huge pile of dirt in the drive way. As I make my way to the back of the house I see the tenant with a wheel barrel putting the dirt into the swimming pool.

The tenant didn’t want the pool so he thought he would fill it in and put grass in its place making the yard bigger for the BBQ area he was building out of concrete.

They promised to pay the rent and repair the damage to the pool and back yard. Not surprisingly, they didn’t.

The tenant didn’t bother showing up to the hearing so when I was done I went to the rental property. The tenant had moved out the night before.

When I went inside, they also removed all of their stuff along with the Kitchen and bathroom cabinet, fridge, stove, washer, dryer, and all the light fixtures.

Now, I know what you’re thinking...

I should have done a better job with my tenant screening. This family on paper was the perfect tenant. To this day I still can't figure out what happened. If you want to be investing in rental property, you’re going to have to handle tenants fighting with other tenants and sometimes with you.

Tenants doing damage to your property, and tenants who don’t pay their rent. You’ll need to know the eviction laws in your state well, and not be afraid to use them.

• Watch this Video: Dealing with Problem Tenants

5). Investing in Rental Property - Surviving Evictions:

Your state’s landlord and tenant laws make evictions seem pretty simple.

To start an eviction, you simply go to the local court, file a notice, schedule a court date, put all your paper work together and show up on that date.

The judge then tells the tenant to leave if he or she even bothers to show up. If the tenant is present at the hearing he or she heads straight back to your property, quickly packs up, and walks out the door.

No harm, no foul, right?

Well aside from the fact you have incurred a lot of cost and you still have to try to collect the money the tenant owes you, the reality is evictions are often extremely costly and time consuming.

Even if you evict your tenant successfully and quickly, you likely will have incurred major expenses or lost significant time in the process especially if you don’t know what you’re doing.

I’ve been through the eviction process before. Keep in mind this process may vary from state to state but here’s an example of how an eviction process and the cost:

1. The tenant doesn’t pay his rent on the first

2. The fifth rolls around and the tenant still hasn’t paid, but you decide to wait five more days to try to avoid filing an eviction.

3. The tenth comes and you still haven’t heard from the tenant so you post a 5 day notice of eviction.

4. The five days are up so you go to the court, pay your fee which ranges from $35 to $100 or more, depending on your state, and the court clerk tells you that the judge is backed up. They can’t schedule your hearing until next month.

5. By the time the court date rolls around, you’re out two month’s rent. The judge decides in your favor, but now you have to schedule a time with the sheriff to complete the eviction. That can take another five days depending on your state.

6. You show up with the sheriff on the 20th and find that the tenant left piles of stuff behind. According to the law in many states, you now have to rent a storage locker to hold the tenant’s belongings. That costs another $50.

Now, if you were very lucky, you have a vacant property that needs cleaning and re-renting. Even at your luckiest, you’ll probably lose at least one more month’s rent while you look for a new tenant.

If you weren’t so lucky, the tenant caused some damages, which you will have to repair before you can rent the property again to a new tenant.

In the end here is a breakdown of what the cost might look like:

• 4 months lost rent at $680: $2,720

• Cost to file in court: $35

• Cost to rent storage: $50

• Cost to make repairs: $800

Total cost to evict the tenant: $3,605

6). Managing Your Finances:

Unfortunately landlords must understand property management is much like a rotating door were tenants move in, stay their lease and then move to a new house.

While some tenants will renew a lease and stay for many years, most will move on to the next place when their lease term ends leaving you with an empty rental property.

In a back economy like the one we’re in today a rental property could sit empty for several months.

To be a successful investing in rental property, you’ll need to learn to manage your finances in times of feast and famine and you will have to be very creative in attracting new tenants when everyone else is not able too.

Slashing your rental rates in not being creative and this is a downward spiral that cannot be maintained because of your variable and fixed cost.

In bad times I’ve seen others investing in rental property cut their rent to where they have a paying tenant but they are losing money every month!

* In months when you have 100% occupancy, your tenant’s rent is paid on time, you have no major repairs you’ll have to be dedicated enough to save and not spend during those months because during other months, you’ll experience vacancies, late rent, and major repairs.

You need to build and maintain a reserve for when times are rough.

Most landlord’s finances do not stay constant. If you can learn to go with the flow, and plan for the unexpected, you just might continue on investing in rental property.

7). Keeping Your Property Safe:

If one or your tenant or tenant’s guest is injured on one of your rental properties there is a good chance you’ll be sued.

Sure if you're smart you will have homeowners insurance but you always have the duty to keep your property properly maintained and everything in good working order so you can avoid contributing to any potential mishaps.

I once had a drunken tenant fall down the stair and break his leg in an apartment building only to find myself in court...

Despite the Police report stating that the tenant was drunk he was able to find an attorney to represent him stating that it was my fault because the transition between the tiles and the carpet at the top of the stairs was lose therefore I should pay for all of the tenants medical bills, time lost from work and compensation for pain and suffering.

By maintaining the safety of your rental property, no matter what it takes will greatly decrease your chance of any troubles.

In order to prevent problems you’ll need to understand your local building and safety codes and follow them by attending to regular maintenance and checking on your properties periodically.

It may take a lot of work at first especially in an apartment building, but can save you a costly legal battle later on.

8). Paying Taxes

While investing in rental property, you can't overlook taxes.

Most new landlords I’ve talk to in the past really don’t understand that renting properties is your business.

Like any other business you’ll have to report the income you earn when you file your taxes every year.

One tax commonly overlooked by landlords is property tax.

If you own the home you live in plus you're investing in rental property your property tax bill could be double what you were paying before you purchased the rental.

Make sure you understand the effect taxes will have on your bottom line and that you are prepared to pay them.

* When your property tax bill comes make sure you review it, check the property value to make sure the value is accurate and if it’s not make sure you file your dispute with the county within the allotted time.

Reviewing and if needed, disputing your tax bill can save you hundreds of dollars every year especially if you have several rental properties.

There are some ways in which taxes can work to a property owner’s advantage...

Particularly in a down housing market.

Consider for example you need to sell your property but can’t recoup what you paid for it. Meaning you sold it for less than what you originally paid for it.

If you sell it as your primary home you can’t claim the loss on your taxes. However, if you turn it into a rental property first you may be able to claim the loss as a business loss against any rental income received or your ordinary income.

This can decrease your tax bill by thousands of dollars especially if you claim a large loss and have a high income.

Tax is a complicated issue so make sure you work with a tax professional to make sure you are doing everything right.

• Watch this Video: Is Refinancing Worth the Cost?

Final Word:

Investing in rental property is a great way to make a lot of money.

Just remember that being a landlord is not all fun and games.You’ll work hard for your money and you will be faced with adversity from time to time.

Investing in rental property is not for everyone. It should be an investment option you consider only once you’ve achieved a certain level of financial independence.

Not only can start-up and ongoing repair costs be significant, but you’ll want to invest a substantial down payment in order to get the best loan terms and minimize your monthly mortgage payment.

If you have been in an appreciating real estate market be aware that eventually the market will turn and you could lose money on your investment ending upside down on your mortgage - if this happens don’t panic. Instead, learn about the Real Estate Cycle.

Real estate prices will eventually go back up.

Still, investing in rental property can be a great way to supplement your income and even replace your current one.

Are you investing in rental property now?

What have you learned from the experience?

Good luck to you :-)

Please feel free to share your rental property experiences with us. Learning from each other is one of the most powerful ways to ensure your project succeeds!

Do You Own Rental Property?

What has your experience been like? Anything you're proud of or would do differently?

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