If you’re looking to invest in your first rental property, it’s important to keep in mind that after you own a number of properties across a number of US cities and or the US states, it becomes more challenging to manage all the properties yourself and as such you will need to hire a good property manager.
If you want to earn a living with real estate you should get comfortable sooner rather than later with managing your manager as opposed to doing everything yourself. You should also get used to remote management. Not every good deal is going to land within a 10-mile radius of your home.
This is my Personal General Advice from my 10 Year Experience
1. Your property manager should provide you with monthly income statements for each and every property that they manage for you. These monthly reports should include any work orders, receipts, and pictures as necessary. The property management companies that I use, direct deposit all funds on the same day of every month (minus property management fees and any maintenance costs for the month)
2. If you’re managing your first rental property, it’s important to keep in mind that some property managers may have account managers who try to dissuade you from increasing rent out of fear of losing tenants. However, it’s crucial to remember that rent increases are a normal part of property ownership and should be done within legal guidelines whenever possible. Don’t avoid increasing rent just because a tenant may refuse to renew their lease.
3. If rent is late, begin the process of eviction as soon as you are legally allowed. Never wait. There is no benefit for you to wait. Your property manager should be charging the tenant any late fees or other charges for this.
4. Fees charged by a property manager range up to 10% of gross rent. The more units they manage for you, the lower this can go. It goes without saying that I believe it’s worth the cost.
5. Make sure you have good insurance for burst pipes and other unexpected occurrences. Outside of the deductible, you shouldn’t have to pay anything if you encounter a problem. Your property manager is key here.
Once the tenant reports a problem, your property manager should notify you immediately. Your first priority is to make sure the tenant is safe. The next thing is to assess the damage in order to determine if you need to file a claim (ie estimate >> deductible = file claim).
If you need to file a claim make sure you provide all your property manager’s details to the insurance company. Their adjuster will then take over to get pictures, estimates, and anything else from your property manager. Your only role here is to connect the insurance company/adjuster with your property manager. That’s it. Go back to bed.
6. Pay your insurance in a yearly lump sum instead of monthly installments. Fees for monthly installments may only be $1-$5 per month per policy but that multiplies quickly once you have a few properties under your belt. Save that money and go have a nice dinner out instead.
7. As a first rental property owner, it is important to carefully review your insurance policy. Some insurance companies may offer to over-insure your property, which can result in paying for coverage you don’t need. Be sure to assess the actual value of your property, and only pay for the insurance coverage that you need. For instance, paying for insurance on a “replacement cost” that is twice as much as your property’s actual value can be a costly mistake. If your property’s market value is $200k, make sure you’re not paying insurance for a $400k replacement value.
8. Condos offer a higher ROI but single-family homes offer more peace of mind. Tenants tend to stay longer and there are fewer problems with neighboring units. And single-family homes are generally in better neighborhoods than apartments.
With condos or multi-units the ROI is better but one unit’s problem can soon be a problem for neighboring units. Tenants also talk about how much they’re paying for rent, which is never good for the landlord. Tenants in multi-units who have issues with each other tend to involve your property management company and subsequently yourself. Renters of single-family homes tend to iron out their own issues.
9. When looking to invest in your first rental property, it’s important to consider the laws and regulations in your state. Red US states (like AZ or TN) are generally landlord-friendly, while blue US states (like CA or NY) are generally tenant-friendly. However, it’s important to note that this is not a political commentary, and ultimately, you should make decisions based on what works best for you and your investment strategy.
10. Debt. When it comes to real estate, sooner or later you will need to decide if you’re going to leverage yourself and to what degree. No matter what anybody tells you, this is not just a math issue. It’s a personality issue. Obviously, you can leverage yourself up to your eyeballs to get massive ROI but your cash flow will be compromised.
Finding Your Comfort Zone in Real Estate Investment: The Relationship between Leverage, ROI, Risk, and Cash Flow
On the other hand, you can have everything paid for, but your yield will be rock bottom and you’ll have monthly cash flow in perpetuity (because you’ll have no mortgage so you’ll pocket all that instead of handing it over to the bank). Somewhere in there lies your comfort zone. Your sleep-at-night factor. Whether it’s maximum leverage of 50% debt-to-equity or 0% or something in between, the amount of leverage that you choose to employ will be up to you.
The general rule is this: more leverage = higher ROI = higher risk = lower cash flow. People who employ this strategy want to get “there” faster. Wherever “there” is for them. X units or $Y million or whatever.
No leverage = rock bottom ROI = lowest risk = high cash flow. This strategy is for people who feel that they are “there”. There’s no need to keep hoarding because you can’t take it with you and/or you want to focus on something else.