Wednesday, November 30, 2016

Are you cut out to be a landlord?

A few years ago, during the real estate crash, I saw properties near me going for less than the places had cost to build in the 1990's. I was shocked. I was a little apprehensive at getting involved, and looking back, that was my biggest mistake. We had saved up cash to buy a house, but with prices this cheap, we could have bought two, but we didn't. That was my first mistake, but since I did not really know what I was doing, I am not sure I could really count that as a mistake. I looked around and found a house to buy. Boy did it need work. It needed so much work that it was scaring people off. There was a dead bird in the family room and a wig in the driveway, not to mention the smell of urine left in toilets for months. I saw past all of that and the other unknown problems and saw a house that could be a great place to live. It had a decent yard, a garage and it seemed to be calling for someone to care for it again. The house had a list price and a note that said that in order to buy the house, a second mortgage of $5,000 must be paid.

 I later found out that the second mortgage was what cost a family their home. They took out a second mortgage to put in a "fabulous" water softening system, then when their water heater broke and flooded the garage, they could not afford to fix it. Since they couldn't live without water, they moved and allowed the house to go into foreclosure. It cost $10,000 for us to fix the house and make it livable. The house was built in the mid 1990's and it appeared that no maintenance had been performed on the house outside of painting rooms hideous colors. The dishwasher was not hooked up to drain, so anytime they wanted to run it, they had to pull a hose out of the cabinet and put it into the sink. It seemed a little risky to me and I have no idea why no one ever fixed that.

 With the help of a few contractors and a lot of work myself, I fixed the house up. The only problem was that nothing was selling. Even if I had listed the house, best case scenario would have been a gross profit of about 20,000 before the realtor was paid her 5%. I decided to rent the house out instead of trying to sell it right away. I had never been a landlord before and started out about as dumb as it gets. I printed off a lease form for my state online and put up an add online. I got calls, I got a LOT of calls. I got calls from people who wanted me to section 8 the house (must have been over twenty of them). In this area, it would take months to get that approval and I didn't want the hassle, but I still had to field the calls. I got a lot of people who couldn't afford the rent or were removed from their last house for non-payment. One person even admitted to me that he was removed for trashing the house he rented.

 So listing this house online was not working. It was making work for me. I researched and found that some realty companies here would list the house for you. They would vet the people applying and I would only hear from them when they found a qualified renter. For this they charged me a months rent. They also offered a service where they collected rent and fixed broken things too, but I was pretty naive and thinking that I had just fixed everything in the house, I wouldn't need the service. They found me three qualified renters the first weekend the house was listed. They explained the background checks to me and allowed me to pick which person seemed most qualified. I chose a person with some financial issues in her past, but one that was caught up from her debts and had nothing currently behind.

The first year, she was great. The second year, she always paid around the 8th of the month. I wasn't too upset because once she hit the 5th of the month, I got a late fee tacked onto the rent. Late in the year, she started paying around the 8th and claiming she paid before the 5th and leaving the fee off. I began to get annoyed, but she had been in the house for two years and had not once asked for anything, so I figured that was just part of being a landlord. The third year was a train wreck and it's not over yet. One month, she had not paid her rent on the 15th of the month. On the 15th, I looked online and found out that in my state, I had to send her a form letter giving her so many days to pay. So I emailed her the letter. She shot me back an email saying I was "rude" and that she had never been late on her rent and she did not appreciate me acting like she was. I asked her if the rent was lost in the mail and got no answer. A few days later, I got payment post marked the 18th. This started to be a habit, but instead of waiting until the 15th, the law here says that after the 5th of the month, I can send the letter, so I started sending it to her on the 6th. She sent my husband emails saying I was rude. Mind you, there was no correspondence in the letter, it was a state supplied form with her name and address pasted into it. So by expecting her to pay rent, I was "rude". Anyway, her lease is up at the end of August, and as of the 7th, she has not paid July's rent. I sent the notice and she emailed saying she will pay for the entire month of July and part of August on the 7th of August and she will be out by then. At this point, I suspect she will not pay July or August's rent and she will be out by August 30th. I want to go to the courthouse and file eviction on her immediately, but my husband wants to wait and see what happens. He says we have her deposit and that we can "hand" it to her and she can "hand' it back for a months rent. If we had hired the rental company to service this house, she would have paid on time or been evicted.

 I know now that I am cold-hearted enough to evict someone, but that my husband is not, so in the future, we would have to hire the rental company to service the rental house as well as find a renter. So these are the questions you need to ask yourself before you decide to purchase your first rental home. 1 Am I the type of person who could evict someone if I had to? 2 Would I make a profit if the renter did not pay rent? 3 Could I eat the loss if we went to court and the person still refused to pay? 4 Do I have time to fix things when the renter calls at midnight saying something is broken? 5 Can you handle doing the taxes or do you need to hire someone to do them? Prior to purchasing a home to rent, you will need to figure out if you need a loan or not. I have heard that there are places that require less down, but most lenders require a minimum of 30% down payment. If you put 30% down and can rent at the local average, would you make money? How much will taxes be on the rental house? Will it need any major repairs? In the three years we owned ours, we put in a new heating system and a new roof, both of which were high cost items. If we had a loan, we would have lost money those years. I do not believe in taking out a loan to purchase rental property, but that is my opinion and you are free to have your own.

I did make mistakes. Since I had no experience as a landlord, it would have been well worth it to pay the rental company to manage the property for me. Even if I had chosen not to hire them, I should have looked up the rental laws and known them prior to getting a renter in the house. I should have been strict from the start. By allowing the renter to pay the rent late without a late fee, I set a standard that she expected me to follow from that point onward. As mean as it sounds, from this point on, I will treat renters like they are two. They will have rules to follow and if they are not followed, there is a punishment. That punishment just might be that I would not be willing to renew their lease. Looking back, I was very lucky. My renter is not the type of person to trash a house, she has only damaged a few small things in three years. What if I had taken one of those potential renters from the online ad? I could have been dealing with a lot more. Being a landlord is a job. It might be a job that takes only a few minutes a month, or it might take hours and hours per month, but it is a job. Before becoming a landlord, ask yourself if you have the time to spend, or if you could afford a rental company and still make money. Is this a pain that you want to deal with? My three years of renting are up, and after fresh paint and carpet, the house will have gone up in value over 50,000 and possibly even 60,000 prior to the realtor being paid, plus I had someone paying me $1000 a month to live there for three years.

 Are you cut out to be a landlord? Are you a landlord with stories to tell? Post them below and let me know what you think.

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