So last week was a difficult week. Both little 1500’s were sick AGAIN, and this time they had fevers, sinus infections, horrid coughs, and all they wanted to do was sit on the couch. They didn’t even fight me when I made them take naps! So my post was never written. Sigh.
TWO weeks ago, I asked about your plans for Valentines Day. I have never been in the habit of celebrating it, and I kind of feel it is a silly “holiday.” I do love how flower prices skyrocket for a week around Valentine’s Day.
Turns out, most of you are also not big on wasting lots of money just to “prove your love.” YAY for you, although it wasn’t a big surprise. I don’t think most of those people who are dropping hundreds of dollars on flowers are reading this blog…
I did get a great present for Valentine’s Day this year – half of my new addition’s plumbing drain lines are in! Nothing says I love you like waste disposal… Mr. 1500 is such a romantic!
So I skip ahead to this week’s question.
We aren’t landlords, but we’d like to be. The issue is that the real estate market in our town is super hot. Most homes we’d consider for a rental (< 250K) usually go under contract within a day of coming on the market and the seller has multiple contracts to choose from.
On Thursday, a duplex came on the market that piqued our interest. The numbers on it didn’t seem to be so hot. The duplex was listed for $235,000 and is currently generating $1400/month in income. If you study rentals, these numbers are poor. It didn’t stop the offers from coming in though. The place was under contract in less than 2 days after a brief bidding war.
This made me think back to the PoP’s duplex. These folks also rent their duplex for around $1400, but they paid an incredible $50,000 for theirs. It astounds me that someone is paying almost 5x as much in our ‘hood to make the same rental income. The PoP’s got a very good deal, but still*.
I’ve gone off on a little bit of a tangent here, but I have real estate on my mind. If you’re a landlord, let us know. We’d like to hear about your experiences and best piece of advice.
*There is an excerpt from Warren Buffett’s 2014 letter out today that discusses buying real estate when everyone else is headed for the door. This is just what the PoPs did.
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JoeTaxpayer says
No. The numbers aren’t good. There are some rules of thumb that are a good start, such as the price to rent ratio. Your numbers show about 14. Research this metric and you’ll see 15 or so as the long term average. You want to be under 10 for a good deal. I own a single condo and the ratio is 11. I am getting a bit of money and having the tenant pay my mortgage.
My next purchase is pending. A 3 family that needs work. After taking the estimate and adding 50%, the total cost is $130k. I know the rents in the area and will get $2200 worse case. This is a sub-5 ratio. And will easily run a slight profit with 2 of the 3 units rented.
I started in real estate 30 years ago, bought wrong, had a decade of bad experiences and got out except for the condo I kept. After 20 years, I got the bug, and this will be my first purchase with a different strategy.
All areas are different, but buying a house that barely breaks even is an accident waiting to happen. In my case, I know I’ll be putting aside the extra money to handle repairs, evictions, etc. once that’s in place, it goes to paying the loan off faster.
At just break even, you’ll dip into your pocket for each new appliance, repair, and months in between tenants. For me, that was how 4 properties became a money pit.
1500 says
Lots of good advice here. Perhaps this is the best part:
‘All areas are different, but buying a house that barely breaks even is an accident waiting to happen.’
I think that my area is out of the question. I’ll never get this here. Perhaps I need to wait until the next recession comes along…
SavvyFinancialLatina says
We are not landlords but we talk about how we would like to be. I’ve heard both negative and positives on the rental experience.
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Alicia @ Financial Diffraction says
I’m a landlord, our of necessity of not losing a huge chunk of change, rather than out of want. We moved just under a year ago, and the market was pretty soft, and all the equity would have gotten eaten up because we weren’t there long enough. So we rented it out.
The numbers aren’t awesome like they would be if we purchased a place specifically to rent (or like the PoPs awesome numbers), but the rent pays the mortgage, condo fees, property taxes, and builds a little slush fund every month. Since we’re didn’t buy when we moved, we can keep it listed as a primary residence (in Canada anyway) for four years rather than automatically turning it over to a listed income property. It buys us some time to build equity, and re-evaluate – likely when we’re thinking about moving again.
1500 says
Nice, you found someone to buy a home for you!
Debt BLAG says
I am. It’s been nice. I went in with the idea that I was going to be, so when I bought my own place, I took all the considerations of needing to rent it out for many years to come into account.
I could talk more about it, but the thing I’ve found to be the most pivotal is having a great property manager
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1500 says
I’d probably manage the property myself. Perhaps this is a huge mistake as I’m not sure I have the personality…
Stacey says
We are landlords. We own two rental properties. One has been running smoothly far longer than the other. It really comes down to quality of tenants for us. The first rental runs itself. Rent is on time, all the time. They do small improvements as needed (we pay for the materials and they do the work). It’s ideal.
The other rental is a pain. It sat empty for 6 weeks when we first purchased it. The tenants have never been on time with rent and I’m pretty sure by the end of the lease, the place is going to be trashed.
What I have to keep in mind is that most things are repairable. We have had awful tenants before and it came down to hiring a good cleaning company (I was eight months pregnant at the time or I would have done it myself) and some basic repairs and some paint. Yes, it cost money. And it ate into the little profit we make on them. But we’re thinking long term and over the next 25 years, these rentals will earn us quite a bit of money with little work (hopefully. There are always those nightmare situations).
Big advice: Trust your gut. If a prospective tenant sets off warning bells and you don’t know why, trust the feeling and keep looking.
1500 says
Stories like this scare me a bit. If I ever get a rental, we’ll do all of the background checks. However, nothing is fool proof.
Michelle says
We would like to get into the rental business, but we haven’t done so yet. We might rent out our current home when we decide to buy our next one.
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1500 says
I hear from lots of folks that rentals in your neck of the woods generate good numbers. I think you should look into it!
Jen @ Jen Spends says
Hope you’re all feeling better! We’ve been dealing with the same in our household.
I’m not a landlord, and I don’t think I have the personality to be one — I’d have a hard time evicting someone or otherwise handling problems with tenants. In my area I don’t think the numbers would work out in my favor anyway.
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1500 says
Bleh, it seems that everyone is sick all over the place.
I’m quickly learning that rentals are a really good idea in some places and a horrible one in others.
No Nonsense Landlord says
I evicted a woman with stage 4 terminal breast cancer. No one stays for free. The bank won’t forgive my payments, I can’t forgive the rents.
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1500 says
No one wins here. I see your point though. As you said, the bank isn’t going to accommodate, so you can’t really either.
Dave @ The New York Budget says
For the past few months, I have been reading FIFighter’s posts about turnkey investing and I am close to taking the plunge in that arena. I have also spent plenty of time on BiggerPockets.com’s forums learning as much as possible about real estate investing.
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1500 says
I just discovered Bigger Pockets! That is a killer resource!
theFIREstarter says
Plus one for reading up on FI Fighters advice on investing outside of your local area. I didn’t think that was possible for me to be a landlord in my local area either as price to rent ratios are not so good, but that has given me a new avenue to investigate!
Big Guy Money says
We are not landlords right now. That is an area that I haven’t had enough time to really research and understand fully, so until I do and until I have the time for another part-time gig, I’ll subscribe to Warren Buffett, “Don’t invest in what you don’t understand.”
That being said, I do plan on understanding real estate investing at some point and thus the door is open.
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1500 says
I hear that rents in your neck of the woods are some of the highest in the nation! Go oil!
Income Surfer says
I am in exactly the same boat. I’ve started looking in other towns, and am slowly getting comfortable with using out of town property managers to manage. Also, you’re spot on about Buffett’s piece for Fortune. It was excellent.
-Bryan
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1500 says
Cool; unless we have another recession that drop kicks prices, no way I’m investing in my own ‘hood. I’d love to hear about where your investments take you.
Steven says
We are Landlords. Our first property bought in Florida by my now wife was purchased as an investment, but more with the idea of appreciation over time. We moved to Chicago and it has since become a rental, with her parents as our property manager on a if needed basis. We have had 3 tenants and one good tenant(currently there, thank God), I would need a small book to provide all the details, but eviction, drugs, and theft, are the low lights.
Our Chicago property is an owner occupied with 3 total units. We reside on the top floor with a 1st floor and garden apartment. Besides a few very small hiccups everything has been great.
Here’s my quick hitter of what we do now from our experience that I think is a best practice:
*Either pay cash for the home or assume that you will never have renters occupy the property, this way if someone misses a payment or an extra expense came along you are prepared, lose a job well now at least you have a fighting chance since you have this new found rental income coming in
*Screen your tenants like they are your worst enemy and you want to know every single thing about them. Credit Check, Background Check, Pay Stubs, References, and be upfront in your Rental Ad(We had people come and look and then when I mentioned the Background Check they became uninterested, kinda like a firewall)
*If a tenant asks for something fixed or complains about something, treat it like your parents/grandparents live there and you want things to be taken care as soon as possible.
*Have an emergency fund for the rental house only and have a go to person for fixes and repairs.
I’m sure there is more but that’s the condensed version.
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1500 says
Wow, thanks for all of the great advice. I like the one about laying it all out in the ad. No need to waste anyone’s time.
Josh says
I am a land lord, and one value I like to look for when purchasing a rental property is that the monthly rent is 1% of the property’s purchase price. I also look for an overall cash on cash return for my investment.
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1500 says
I’ve heard of the 1% number before. I could never get that in my own ‘hood, so I’m going to start looking elsewhere. I don’t like the idea, but the numbers will be a lot better.
Kemkem says
Yes.. I am a landlord. I have had good experiences, and really really bad ones! I’ve had to evict tenants. I’ve had thrashed places. Oh my god, the horror!!!! We have since sold 4 of the condos/houses and kept 1 condo (currently in the process of evicting the tenant), 1 single family home ( breaks even, great tenant) and our primary home which we are currently renting ( makes money). We are selling the condo after the eviction, tired of it. Even with a management company, cross checks, credit checks etc..you are just sometimes unlucky. I want to sell before it becomes a money pit. Since we are pretty happy over here, we will sell our primary residence too once the renters leave. We will just keep the place that breaks even. The mortgage is small, and if we ever move back, we can move in there. Think very very carefully before you get into it. It’s great, but there is a lot of stress involved. We were also in Texas , the properties don’t really appreciate that much. There is so much land, they just build something new all the time, and all of a sudden, a 5 year old house is competing with a brand new one, and no one wants to buy a house that’s “old” meaning as little as 10 years..:0))
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1500 says
My logical brain tells me that if I thoroughly screen people, I’ll be able to get only good people. Your response tells me that is clearly not the case. Your experiences make me reconsider. I don’t need this kind of stress in my life.
cadence says
I am: we bought a duplex and live in half and rent the other half. Its been really nice so far, I think mostly because we have had good tenants ( the neighborhood has gotten “hipper” since we bought, and we can pick and choose between many qualified tenants), and the fact that it is a side-by-side duplex with A LOT of sound insulation in the shared walls. It doesn’t totally cover our living costs, but it makes them a whole lot smaller.
1500 says
Sharing a duplex sounds like a great idea. I wish I would have thought of that. Only worry would be living feet away from a naggy tenant.
cadence says
Yeah, I think it may help that the unit we’re renting was gutted when we bought the place, so the interior & fixtures are all new / newly repaired 🙂 talk to me in a decade when things start breaking down regularly. When we started looking, we were renting the lower unit in a duplex that was one unit above another, and even with sound insulation that was a little too close to the neighbors, who had a 5 year old boy who got up at 5am and ran constantly back and forth for an hour or so every morning. So we had an idea of what we were looking for, and not looking for.
Mrs. Pop @ Planting Our Pennies says
Those prices and the bidding wars… it makes me really wonder if the low interest rate environment has gone on long enough. Too much easy credit contributing to the price increases? Maybe…
Thanks for the link to the Buffett piece – looking forward to reading the letter this year!
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1500 says
I know! I won’t be at all disappointed when rates start going up. Come on already.
Mrs Y says
We are not landlords, as we are not handy enough to handle some potential repairs. We do realize that rental income will generate a decent amount of “passive” cash flow though. However, the problem is with our
property tax being too high it can eat up to half of the income stream. One of our relatives is currently renting out his house, but after the management fees and taxes, it is probably less than $1200 a month. Considering it to be somewhat a big and upscale house, it is really not worth it. The yearly return on the investment is around 3%. It can hardly keep up with inflation.
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1500 says
Bleh, that is disappointing. 3% is definitely NOT worth the hassle and worry.
Liam @ HBS Real Estate says
I am a landlord. I’ve had good and bad experiences. I picked up a duplex that needed some work for $38,000 and it rents for $1,100/month. Deals like that are available around the country. If your area is too expensive, it’s worth looking farther afield, such as one previous responder mentioned w/ FIFighter’s posts.
I’ve generally found that there is a little headache, but not too much, and it’s certainly worth the cashflow.
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1500 says
Wow, that is a killer deal. 4 years and it’s paid off! Umm, where are you? 🙂
Liam @ HBS Real Estate says
State College PA area. While my deal is a good one, similar deals are available around the country. Knowing how to look for them are key.
While the $1,100 looks great, that includes the repair reserves ($110/month), anticipated vacancy ($110/month) and property management fee ($110/month; I manage myself, so I pocket this fee).
Once taxes, mortgage, etc are paid, and pulling out the above amounts, I’m left with about $400/month cash flow from the property.
Generally you want to look for $100/month/door when you initially purchase a rental property. I know it doesn’t look like much, but that $100/month generally grows over time, your residents are paying down your mortgage, and if the property is appreciating, you gain from that as well.
In my local market, I look for a minimum of $150/door/month (I manage myself). If I use a turnkey provider, or purchase and rehab myself in an out-of-area property, I look for a minimum of $100/month, but generally try to get $125/month.
Going into REI with the right mindset will set you up for success. The wrong mindset will destroy your portfolio.
1500 says
Thanks for all of the great information. I’m going to proceed really carefully with landlording. I’m interested in playing the long game, not making a ton of money from the onset. Slow and steady…
Ryan @ Impersonal Finance says
I’m not a landlord yet, but it’s something I’m seriously looking to get into. Only like you, I’ve got to wait until the time is right. I don’t want to make what could end up being a major mistake. I imagine I will probably end up owning a rental property within the next 12-18 months, if I’m able to find one that doesn’t require too much work to turn into something decent, and one within our budget. I thought Steven had some awesome advice in his comment above. Hope your kiddos are feeling better!
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1500 says
Thanks Ryan, kids are back to normal and have resumed fighting with each other.
Yes, landlording should be approached with extreme caution.
Green Money Stream says
We are not yet landlords but it has been on my mind for some time. Right now, purchasing a rental property is something that I plan to do as I get closer to early retirement. I’d like the alternative passive income stream and I would have more time to handle any issues with the property.
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charles@gettingarichlife says
You have to have the right personality to landlord otherwise you should outsource to a management company. I do everything myself except repairs, I have a handyman for that. Always run a credit and background check on all tenants. Ask for two landlord references, if they’re a pain in the ass for their current landlord that landlord will tell you anything to get rid of them. The one prior will be more honest.
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1500 says
“Ask for two landlord references, if they’re a pain in the ass for their current landlord that landlord will tell you anything to get rid of them. The one prior will be more honest.”
This is great advice! Thanks!
No Nonsense Landlord says
Actually, if the current landlord says that they are “Great Renters”, beware. The current landlord might just want them to move…
Sharon says
I’m not a landlord yet, but I sure plan on being one some day. I’m sure you follow some real estate blogs, since you’re interested in the topic, but I thought I’d share one that I follow because I feel like it has a wealth of fantastic information on it. I follow Brandon Turner on The Bigger Pockets blog. There is so much information! I highly recommend it. Good luck on your real estate ventures. I have landed on your blog several times in the past year and I love your goals. I wish you the best 🙂
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1500 says
Bigger Pockets is just a fantastic resource. I need to spend a weekend just absorbing it. I also listen to their podcasts at the gym.
Thanks for the kind comments; much appreciated!
Done by Forty says
We are kind of landlords, as we rent out a room in our house and have done so ever since buying our first home. We have a full lease agreement, application, etc. But it’s a lot easier, I think, than it would be to rent a separate home. Like you guys, we’re looking at possible rentals and trying to make the numbers work for a local property. It’s not easy going, so we’re also considering a turnkey rental in other cities.
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jane savers @ solving the money puzzle says
I nearly bought a small rental townhouse last summer but couldn’t come to terms with the man I hoped to partner with. I am not handy and will not attempt it on my own because I would have to pay management fees.
Eviction is not easy in Canada and a coworker is fighting through the process while the tenant remains in the home and does not pay rent. It has put me off being a landlord and makes me very happy to watch over my little collection of stocks, ETFs and GICS that never call in the middle of the night when something is wrong.
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Drew says
When I first purchased my house I was renting the main floor and there were two basement apartments. After the purchase I continued renting the basement and lived on the main floor. It went well for a while until one of my tenants left and I had to get another tenant. Doing the viewing and checks took a lot of time and I still ended up getting a bad tenant, which ended up costing me the good tenant I had. I had the apartments for about 3 to 4 years and the income from them paid my mortgage so I was left with just paying the utilities, insurance, taxes, and maintenance which was a pretty good deal especially in the early years of home ownership.
A friend of mine just recently purchased a 20 unit building which is occupied by all seniors and when he did have a unit come open, one of the things he did was try and fill it with another senior (its not a seniors only building so he had to do this through screening the applicants). He finds the seniors just want a safe and secure place to live and having other seniors there gives them a sense of comfort so it works well for him.
1500 says
The senior building sounds awesome. I’d totally invest in that.
On the other hand, you present yet another horror story. Scary. I can’t imagine the stress that would cause. Ever see Pacific Heights?
Brad @ RichmondSavers.com says
I guess I’m in the minority here, but I can’t imagine that I’d ever want to own a rental property.
Everything I do revolves around simplifying my life and reducing stress and I cannot imagine anything more stressful than having to worry about having a significant portion of my net worth tied up in something that can burn down, get destroyed by tenants, sit empty for months at a time if we can’t find tenants, etc. Not to mention repairs (which I can’t do), property taxes going up…
I’ll buy the argument that it diversifies your finances, etc., but it is just the polar opposite of what I want to do with my time and money. Just thinking about it stresses me out! 🙂
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1500 says
Brad, you make a very, very valid point. I still may do something real estate related, but hands off, Perhaps a REIT or investments in realtymogul.com are the way to go…
Brad @ RichmondSavers.com says
I know many people get wealthy off of rental real estate, so I don’t meant to paint such a broad negative brush!
It’s just to me having to deal with rental properties is the opposite of “living the dream”; if the 1500 family is already in a position of nearing FI, and you aren’t looking to ‘get wealthy’ at that point, I just personally wouldn’t want to introduce all that stress needlessly.
My perfect life is really essentially owning nothing, so I know I’m a little extreme. Especially once my kids graduate from high school and the school district isn’t essential to where we live, I want to be completely unburdened by location and some house that I can’t stand to pay for every month, maintain, etc.
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Refinerr says
I’m not a landlord but my maternal grandmother was for 40+ years and my mother is currently as she inherited some of her properties. I’m sure before you go into it you’re going to check out great resources like FIFighter, Bravenewlife, etc so you can get the right calculations but as someone mentioned you can’t calculate your ability to be a good landlord. I specifically mean your personality and conflict management abilities.
My mother has a horrible time finding and managing tenants. She doesn’t like conflict and is what you’d describe as a “caretaker”. She doesn’t focus on the money and I’ve seen her charge $1700 per month for beach view house in south county CA. These same people never paid on time so she got dinged for late fees. She never charged the late fees stated in her own lease agreement because they “don’t get paid on the 1st”. She doesn’t assume people will trash her property because SHE would never do that even as a tenant. These same people had a mouse infestation in the wall and never said anything. I know this because I was the next tenant to move in. In fact the only reason she made them leave was so I could move in after I got married.
In contrast, her mother purchased multiple beach properties and did very well for herself. She was cold as ice. Made for a terrible grandmother but man did she own the real estate market! She bought low and sold high and in-between her properties consistently created money for her. She did this without a high school diploma let alone real estate experience.
If you can’t manage a property in a way that consistently generates profits, then you shouldn’t be a landlord.
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1500 says
“Made for a terrible grandmother but man did she own the real estate market!”
Ha! I’m not like your grandmother, so perhaps I should reconsider. I’d rather take an extra month to find a good tenant, but it seems that even the best ones go bad sometimes.
Refinerr says
I’m an awesome tenant but partly because I know what it’s like for my mom being a landlord. If you find someone with that background it helps. I also created a Renter Resume for myself & husband which you could use to find good tenants!
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Dividenden-Sammler says
Hi Mr. 1500,
I have found your site today!
Very good work!
I´m not a landlord!
For myself, I have too much problems to let a house!
Can the tenant paying the rent?
What can I do, if he don´t pay the rent?
A lot of questions…
In Germany, the tenants have more rights than the landlord!
And that is a problem for me!
Therefore I decided to buy a house for my family and me.
The house is now debt free! Good work 😉
And now, every Euro will be invested in shares…
Best whishes!
D-S
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1500 says
Greetings Germany!
“In Germany, the tenants have more rights than the landlord! And that is a problem for me!”
Well that is not good and you can bet that the bad tenants know it.
Andrew@LivingRichCheaply says
So true about the flowers on Valentine’s Day…I refuse to pay those astronomical prices. As for being a landlord…I’m still renting and can’t even buy a place for myself. Such is life in NYC…real estate prices are pretty crazy. The only type of real estate that can be somewhat affordable are co-ops and with their restrictions, you’d most likely not be allowed to rent it out.
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No Nonsense Landlord says
I am a landlord. 24 units I own, plus I help manage some other property for a fee.
Check out my blog, I have been putting a few tips out there, along with some other thoughts.
It’s easy, if you can follow a cookie cutter approach. Invest for cash flow now. Invest in neighborhoods that you can get decent renters. Then do it.
I have over 100K per year in passive income, after expenses.
1500 says
Wow, that is pretty incredible and inspiring NNL. I’m heading over to your blog now.
No Nonsense Landlord says
Hopefully you have had a chance to check out my blog. I had some trouble over the weekend with it, as I moved to a hosted account and to WordPress. A bit of issues and re-installs, but it is working now.
Getting great tenants is #1 key. 24 of 25 rents collected by 3/2/14, with the last one coming tomorrow after she gets to the bank to get a money order. Even my slow payers are fast!
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Nikki says
We became landlords by way of having one too-small home that was underwater but desiring to get into something better while rates were still low. I’d like to hang onto it and continue renting it even after it’s no longer necessary.
We’re about six months in and to be very frank, the learning curve is tough. There are a lot of things to know from repairs to laws. When it’s just a person to person instead of a company, it has it’s emotional toughness. We honestly thought we had a perfect tenant. Credit check came back stellar. Has a Master’s from MIT. Lieutenant in the Navy. Set up automatic payment direct into our account. Signed a year lease. He just announced he’s buying a house and intends to terminate the lease 5.5 months early.
We found this out on a weekend getaway and it put a major damper on the whole weekend while we stressed out about what our move should be. But, it’s a learning experience, we’ll know what to do next time, and this is why you have to look at it as just work and work is stressful and obnoxious sometimes. It’s hard because this kind of business is pretty personal and we were super nice to the guy (even letting him move his stuff in about 10 days early for FREE to give him time to clean his old apartment). The disappointment of having thought we had a good one is actually one of the harder parts.
As for not having the heart to evict, one of my first emotions was that I felt bad making the guy keep paying up when he doesn’t live there. Until I asked myself if we should suffer (and put it into the scope of letting go of planned improvements to our new home) because of choices he made and his failure to fulfill a contract. Then, even as a major softie, I got right over that.
1500 says
Wow, that guy sounded like the best tenant ever. Stories like this really make me think twice (or 3 times) about becoming a landlord. It seems like the stress isn’t worth it at times. I can’t imagine what it’s like when someone stops paying, has to be evicted and trashes your home (I’ve heard many stories that go that way).
Anyway, thank you for sharing your story.
No Nonsense Landlord says
The personal part of the hard part, but necessary. I once evicted a woman with stage 4 terminal breast cancer. She died 6 months later.
Put on your property managers hat, and do what a property manager would do. Take the owners hat off.
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