The First Year of Owning a Rental Property
It’s been one year since our first residential rental property opened for business. I say that because it’s very important to treat investment property like a business. After being landlords for a year, I though I would share my thoughts on the whole process of rental property ownership.
We chose to use a property management company, and up to this point, they have done a wonderful job. The particular company we use has an agreement in each lease to go in every quarter for seasonal updates to the property. While, this is true, it’s actually a great way to make sure the tenants aren’t running a meth lab in our house. We also get a report after each inspection with repairs that need to be done right away or in the future.
Our tenants were late with the rent only one time. They paid about a week late, along with the $50 late fee. I’m honestly very glad I haven’t had to go chasing anyone for late rent because I’d probably be a sucker for a sob story. For now, we will keep property management so that we don’t have to worry about things like this.
I’d say we were pretty lucky this year. There were a few minor repairs and a leak under the sink, but those were easy fixes.
In Colorado, the landlord does not have to cover any of the utilities, so our rental lease states that all of those are tenant responsibilities. The water and sanitation departments used to one department and would let tenants put the bill in their names. This is how our tenants were billed in the beginning.
Then, those departments had a falling out and decided to separate. Now the sewer bill comes separately, but they won’t allow anyone’s name on the bill except the property owner. They will send a separate statement to the tenant, but we are still on the hook if it isn’t paid.
We were bummed at first because we assumed this meant an extra $30 per month out of our pocket. The tenants had no reason to pay up because the bill was in our names, but amazingly, they did. We had a couple of months when we had to pay while everyone was getting used to the new arrangement, but since then, they haven’t missed a payment. I do call every month to make sure, but knock on wood, it’s working out pretty well for the moment.
We know that when our current tenants move out, we will need to replace some windows. The current ones are functional, but old and not very efficient. We decided to replace a few with every turnover of renters, so that’s an expense we know is coming.
Emergency Funds are So Important When You Have Rentals
You also never know when an appliance might die or a major repair might pop up. That’s why we are keeping a pretty hefty emergency fund. Right now, any rental emergencies would come out of our general savings.
Our goal is to keep saving our cash flow every month until the rental account has $10,000. Then we will shift some money from our general emergency fund into better income producing investments.
How Much Did We Make?
As of October 1,our rental property has brought in $6776 for 2013, and our expenses including mortgage, insurance, taxes, property management, the sewer bill for a few months, and repairs was $3840.81. That makes our net gain for this year $2935.19.
However, last year was a different story. Our renters moved in at the end of October, so we only had two and a half months of rent in 2012. Because we had to invest some money to get the property ready to rent, our numbers at the end of 2012 were -$5683.15, which doesn’t include the down payment and closing costs. When you look at the full 12 months from October 2012 to October 2013, we are in the negative by -$2747.96.
Is It Worth It?
Considering that we have done pretty much nothing since getting the property renovated, I think this is an easy $245 per month. We owe about $46,000 at 4.25% on the balance of the mortgage, so this is something we could conceivably pay off to increase our monthly cash flow. We haven’t decided if this is the best use of our liquid funds.
Yes, it did take some money to get started, but the way I see it, someone else is paying off this house and whatever repairs it will need in the future. We can sell it someday for a profit or keep it as an income source for retirement. This one property isn’t going to pay our bills, but it adds to other streams of income that we are in the process of developing.
Our tenants just renewed their lease, so hopefully next year will go as smoothly as possible. I’ll let you know either way.
Would you love to be a landlord or is it smarter to invest in the stock market?
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I love how you shared your different encounters and what to expect. It was very informative and helpful! Thanks for sharing!
Yup! It’s so true. I stop calling them “emergency funds” when it comes to my rental properties because I’m never surprised anymore when they need maintenance or repairs. Even the most well-intentioned tenants will find new and surprising ways to cost me money 🙂
I’d love to be a landlord someday, so I love reading about your experiences. It sounds like you have some reasonably reliable tenants who haven’t decided to start a meth lab. Using the property management company sounds like a no brainer for anyone who doesn’t enjoy maintenance work. Thanks for sharing.
We really really want to buy an investment property. We’ve considering buying something in Maine by my parents so they can act as an unofficial management company. My step-dad is a few years away from retirement and enjoys doing little projects around the house. We also couldn’t afford to buy another property here because prices are so insane.
What are the property costs like in Maine? I know nothing is as expensive as NYC, but I assumed all of New England was pretty pricey. I can’t imaging a better property manager than a handy Dad!
I think using a property management company is a smart move. They can handle all the details like collecting rent and maintaining the property while you can focus on the bigger picture.
That is exactly why we use one!
I think renting a property nowadays is a dangerous game. The local council around where I live are terrible in terms of support anyway (helping with problems you have with the home) and above that are forever adding new costs and making it harder and harder for you to pay it off. It is pretty scary.
It looks like you’re on your way to becoming a real estate magnate, Kim! I would use a property management too. My time is already scarce and it would be worth the cost to me. We haven’t ventured outside our own home but it’s something we keep in mind. Real estate is so expensive in LA. Anything cheap isn’t very nice and I’m not ready to pull the trigger on another big loan.
Geographical area can certainly make or break a real estate career. It would be nice to be a real estate magnate, but I think I’m a ways from that.
Glad the first year turned out well. I would definitely use a property manager too… too much mess otherwise. I also would probably be too strict with money required upfront (I would want first and last months rent plus one month’s deposit) so I don’t know how good I’d be as a landlord! Living in NYC does teach you both ends of the spectrum–how bad a slumlord can be and how terrible a deadbeat tenant can be so I’d want to be prepared for the worst, lol.
I would not be able to sleep if I wasn’t fair. Although a bad tenant might make you want to cut some corners. I hope I don’t have to find out.
I was a landlord for roughly 13 years. I owned 44 units of apartment buildings and a shopping center. It helped me reach financial independence in my late 30’s! I believe in rental property, but like larger units because of economy of scale. Congratulations on the profit and you are on your way to a real estate empire.
I don’t believe there is an apartment building that big in our town, but I’d love to branch out into duplexes or four plexes at some point. The only problem here is that multi unit properties tend to attract the kind of tenants we don’t want, so it would have to be a bit nicer than what is available here now for the most part.