One month, she tried to pay in canned goods and STDs
Every other post, you guys write about making money through real estate. It’s not that simple.
We never said it was. If your wealth plan consists of nothing more than buying the cheapest house you can find and then placing an ad on Craig’s List for a renter, of course you’re going to fail. Here are some other handy tips to turn passive income into passive outgo:
1. Don’t do your homework.
If you want to become a residential landlord, it takes 5 minutes to determine how much units are going for in your selected neighborhood. And another 4 minutes to see how much competing landlords are charging. Once you do, you can easily calculate cash-on-cash return on your investment (which is your down payment, divided into the rents you receive less the operating expenses and mortgage payment.)
You really do make your money going in, a truism that applies to most investments. Do the prep work before you get started, and you won’t be in the position that so many failed landlords end up in: a couple months later, losing money every month and not understanding why, then running the numbers and realizing that the only way to make cash flow on the property is to charge 3 times market rent. Which no renter will pay, and which you won’t be able to charge until the lease you made the current renter sign expires anyway.
2. Maintain a personal relationship with your renters. We know one gregarious, outgoing guy who built his wealth in the glamorous business of hair removal. When the money started coming in, he began buying houses. His pleasant demeanor is killing him as a landlord. He collects the rent personally: that is, when the renters feel like paying. He admits that at least one renter’s kids call him “Uncle Pete”, which means the battle’s already lost. When we asked if he bought the kids Christmas gifts, he laughed but didn’t answer.
How to fix this? Staying detached isn’t that difficult. Friends are friends. Accounts receivable are accounts receivable. There’s no reason why the twain need to meet. Uncle Pete could have saved himself aggravation if he’d hired a property manager.
We can’t say property managers are worth their weight in gold, because many of them are overweight middle-aged ladies who weren’t adept at selling real estate for commission and thus chose to work on what’s essentially salary. But a good property manager will save you myriad headaches.
Property managers usually charge 8-10%. For that they’ll find you a renter, collect the rent, and deal with all the unforeseen problems that come up so you don’t have to (calling someone to fix the dishwasher, et al.) It’s worth their cut just for you to not have to deal with collecting the rent yourself. Not because collecting rent eats up a lot of time, but tracking down even one late tenant will make you appreciate the value of a property manager.
Say a tenant wants to beg you for an extension, or explain to you that he wants the late fee waived because he needed money to buy his daughter a new pair of crutches for her polio. He can’t do so if he doesn’t know how to contact you (or better yet, doesn’t even know your name.) Instead, everything goes through the property manager and it’s not your problem. She’s experienced at this and knows how to keep the relationship purely business. She can be a good cop and shrug her shoulders when the tenant begs for a break; “I really would love to help you, but the landlord’s being obstinate. You’re right, he’s such a jerk.” Or she can be a bad cop and put her foot down. “These are the rules. You’re welcome to leave in the middle of the night and have us hold onto your security deposit, if you’re that kind of person. Did I mention my daughter’s married to a police captain?”
3. Don’t do due diligence.
In the early 21st century, there’s no excuse for not knowing as much as you possibly can about a person who’s in a position to defraud you. Google a potential renter’s phone number, and you might be able to find his long-dormant MySpace page on which his friends have left posts discussing the awesome strain of Panama Red they recently smoked. A simple name search can lead to the endlessly fascinating WhosArrested.com (WARNING: you can spend hours on there.) Confirming that a renter is clean and responsible – or at the very least, isn’t waving any red flags in your face – isn’t that hard to do.
Ultimately, be cold and antiseptic. Remember, it’s business. Save the wimpiness and the malleability for your child-rearing and your other personal relationships. Ruthlessness isn’t a necessary condition for building wealth. But letting yourself be a doormat is a sufficient condition for losing wealth.
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Another option: manage the property yourself, but pretend that you’re not the landlord. Pretend that you’re the property manager. That way, when the tenant begs for an extension, you can shrug and say, “I’d love to, but my boss would fire me. Yeah, I know, my boss is a jerk.”
I haven’t done this (the pretend-property-manager schtick), but I’m intrigued by the idea.
If you’re uncomfortable lying, the “honest” alternative would be to blame the banks. When the tenant begs for an extension, you can shrug and say, “I’d love to, but the bank would come after me. Yeah, I know, the big banks are so greedy.”
I’m a terrible liar so I’ll just stick with my property manager