As the idea of having passive income becomes more and more popular, I find that there has been an increasing number of people inquiring about real estate investing in the hopes of replacing their income. If you work towards this goal hard enough, it is possible and there have been many people who have accomplished this. However, let me warn you though that there is nothing fancy or great about being a landlord. I understand that there is pride of ownership for your own home and your investment properties, but I can tell you for a fact that I don’t know anybody who wakes up in the morning and says “I can’t wait to be a landlord today!” So here are the top 5 things I wish I knew before being a landlord.
#1 – NEVER rent to your family and friends.
This one is a trap that so many people fall into. This may happen because you don’t want to go through the hassle of finding a tenant because it’s too much work, but you know a friend who needs a place to live. Since you know them from before and they’re not a stranger, you inherently trust them to take care of your property. Does that sound familiar? Well, it happens all too often. Don’t fall into this category! As harsh as it may seem, never rent to family or friends because getting them out is always going to be extremely hard. Increasing their rental rate will always be hard as well. They will likely pull the family or friend card on you to guilt-trip you into doing things that are in their best interest (but not necessarily yours). They may also not be taking care of your property in accordance with your expectations, and getting them to meet your expectations may be a touchy subject for you to bring up. Even if you outline all of the terms of engagement in advance, the situation may get sticky in the future. You can think of this as having the same feeling as if you were to lend money to a friend. It’s awkward to ask for that money back when you need it, or worse yet, it affects the relationship.
#2 – Treat your investment property as a business.
This will keep coming up in this series of Landlord Lessons. You must treat your investment property as a business. It produces income in the form of cash flow for you, so treat it like a business. A business needs attention to grow and blossom, and so does your real estate portfolio. If there is maintenance that requires your attention, then fix it. If you need to serve late payment notices (i.e., N4 from the Landlord Tenant Board), then serve them right away. This is especially true for tenants who give you excuses for late payments all the time. If the cost of carrying your property increases, which it does every year, then increase your rent.
Don’t fall into the trap of being emotional or lazy. If you’re overly emotional or lazy at your 9-5 job, then chances are, you won’t be very successful. If you want to create wealth with real estate, then you must treat it as a business.
#3 – Late night calls actually happen very infrequently.
Everyone is worried about a late night call at 3 AM from tenants. This has a lot to do with the expectations that you place on being a landlord. Very rarely do you actually need to pick up a call at 3 AM unless it’s for a leak. If you own a condo, the tenants will very likely call the concierge at 3 AM. There is really nothing you can do about it even if you show up to the condo, I mean unless you’re a licensed plumber. Although you need to be accessible to your tenant, you don’t need to be accessible 24/7. Constantly catering to your tenant’s every need makes them rely on you for absolutely everything – that’s an expectation that you do NOT want to set from the get-go. My general rule of thumb is that if there’s a leak, then respond immediately, otherwise for most other things, a response within 24 hours is sufficient. If this is a huge obstacle for you to overcome, then just hire a property manager. Property management is worth every penny if you are nervous about being a landlord, or if you don’t like to deal with people in general.
#4 – Always have an emergency maintenance fund.
My general rule of thumb is to have 3 months of mortgage payment in the bank for emergency funds. If there are any late payments or repairs/replacements that need cash, then you have the funds for it. Try to keep all cash flow earned in the emergency fund until you can bank up 3 months of mortgage payments. If the property doesn’t cash flow well, then put 2 months of mortgage payments in the bank account upon closing, in essence treating it as part of the closing costs.
#5 – Do not be an absentee landlord.
This one is super important and I’ll go more in-depth about this later in the Landlord Lesson series. Being an absentee landlord usually leads to damages because the tenant doesn’t think you care about the property. By not addressing your tenant’s issues in a timely manner, this leads to bad communication and when something big does happen, all of the smaller things that you never tended to bubbles over. You don’t have to be hyper-responsive, just treat it like a business and provide timely responses. If your tenant is a client, you would respond to your client within a reasonable timeframe.
The Wrap – So those are the 5 top things that I wish I knew before becoming a landlord. If you are really concerned about buying your first investment property, I hope these insights have helped ease your concerns. Being a landlord may seem daunting because of the horror stories told by many, but those stories are honestly far and few in between. The rewards you that reap as a real estate investor far outweigh the fears and downsides of being a landlord. If you are on the fence and don’t know what to do, please don’t hesitate to reach out to me at Zhen@PrimePropertiesTO.com, and we’ll find the appropriate property for your next investment.
Until Next Time, Happy Real Estate-ing,