THE AMERICAN DREAM GONE AWAY… The endless online resources advertising the benefits of buying a house to rent out make it seem an easy and seamless process. With step-by-step guides, making money as an investor and property manager can be deceivingly simple path. Without accounting for the risks and hardship, you can end up realizing that buying a house was a big mistake. Below, 4 lessons to learn from as an investor:
1. When Renters Can Do More Damage Than You Realized
It’s no secret that anyone who has owned rental properties has shared a few horror stories about the kind of damage renters can leave behind. One homeowner and property manager was fully aware of such stories, but was not prepared or expecting to experience and deal with it.
This property manager ended up in this stressful situation when one of the tenant families abruptly broke their month-to-month lease and moved out in the dead of winter. Showed up at the house to do a final walk-through and inspection of the property, a disaster was lying in wait.
All of the doors in the home were removed and no where to be found. The carpet, which had been new when the tenants moved in, had changed colors completely. The front door had been badly damaged and the door frame had been haphazardly glued back together in a poor attempt to fix and hide it. The picture window in the front of the house had been broken, replaced with a window, and didn’t fit or match the windows in the rest of the property.
The house had been in exceptional condition the last time the property manager had visited only eight months before. An unfortunate and tragic personal situation between the tenants had led to the total destruction of the home in a relatively short amount of time.
After fixing and replacing everything in the home (having the previous tenants paying for most of the damage), the property owners couldn’t help but feel that buying a house was a big mistake. Avoid and minimize property damage with regular house inspections.
2. When Your Property Taxes Might Increase…Significantly
This investor and learned an unexpected lesson when the property tax bill came in the mail. The property taxes on the home had increased by nearly 300% overnight, resulting in weeks of stress. These investors immediately felt that buying a house was a big mistake.
Knowing that the property taxes would go up somewhat, the investor was still surprised due to a misunderstanding of the state taxes. The state offered a homeowner’s exemption on a property owner’s primary residence, but charges a property tax on properties other than the primary residence.
The problem was that the homeowners had based the rental price on their previous mortgage bill rather than the new one. So, for the first year that they rented out the home, they only broke even instead of making a profit. Fortunately, they were able to readjust the rent accordingly and raise it to take the higher property taxes into account.
3. When Repairs Are Expensive and Unexpected
When it comes to buying and renting out a home, one of the inevitable struggles is fixing repairs. When considering renting out a home, a critical aspect to take into account it paying for repairs. Landlord and tenant laws require that serious repairs are made quickly. Otherwise, more damage and even fees could come your way.
In the 9 years that these investors have owned their homes, they have replaced a furnace, an air conditioner, two refrigerators, and a stove. They paid for a new sump pump and underwater drain system in one of the crawl spaces. They have spent hundreds of dollars on drywall repair, paint, and carpet. None of those expenses even include the $6,000 they spent to repair the property their renters had severely damaged over the course of one year.
Fortunately, most of those costs were charged straight to their renters. Because both of their properties brought in a steady and strong profit each month, they were able to use the overages to pay for cover repairs, upgrades and whatever else came up.
Nonetheless, a portions of the money had to come out of their own pockets, and those unexpected repairs always seem to come at the most inconvenient times possible. When they first became landlords, they did not have a significant emergency fund for those unexpected repairs meaning they needed to dip into their personal savings to pay for anything that popped up. For them, buying a house was a big mistake. They quickly learned that an emergency fund for repairs was essential.
4. When You Can’t Find Tenants
It’s been said that landlords need to look at property management as a rotating door. Tenants come in, stay their lease, and then go. While some tenants will renew a lease, most will move on to the next place when the lease is through and leave you with an empty house. In times like this, it’s all to easy to feel that buying a house was a big mistake.
Depending on a number of factors, the house could sit empty for several months. If this happens, it means you’ll need to learn to manage your finances in times of feast and famine. There are ways to minimize this however, when you take measures to increase your occupancy rates. There will be times in which you have full occupancy, rent paid on time, and no repairs. You’ll have to be dedicated and wise enough to save and not spend during those months because it’s inevitable that you’ll eventually experience vacancies, late rent, and major repairs.
A landlord’s finances never stay constant. If you can learn to go with the flow and plan for the unexpected, you just might succeed.