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First time Homeowner/Landlord Advice
Syzygy
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Registered User regular
So yeah, title. I finally have the money and credit score to potentially purchase a modest property, but this will be the first time I've ever owned property, let alone a house.
What I would like to do is rent out the extra rooms to ease the burden of paying the mortgage to nothing, and keep anything extra saved for if/when something goes wrong or needs work. I also know very little about managing tenants, except I would think I'd want to write up a contract detailing the terms of lease? Is that something I can just write myself and if they sign it it's legally binding or do I need a lawyer to write one up for me for it to be considered a legal contract?
I get conflicting reports from other property owners that being a landlord and renting out is either a nightmare not worth anyones time, or they say it's an easy way to generate passive income. What sorts of things should I do/be aware of? Are there any traps people new to this stuff like myself tend to fall for that can ruin everything or make things harder than they should be?
What I would like to do is rent out the extra rooms to ease the burden of paying the mortgage to nothing, and keep anything extra saved for if/when something goes wrong or needs work. I also know very little about managing tenants, except I would think I'd want to write up a contract detailing the terms of lease? Is that something I can just write myself and if they sign it it's legally binding or do I need a lawyer to write one up for me for it to be considered a legal contract?
I get conflicting reports from other property owners that being a landlord and renting out is either a nightmare not worth anyones time, or they say it's an easy way to generate passive income. What sorts of things should I do/be aware of? Are there any traps people new to this stuff like myself tend to fall for that can ruin everything or make things harder than they should be?
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It’d cost about 20 percent of the rental income, but having them handle everything, keeps you out of it, you are in effect another tenant. And if they don’t pay they property management firm will handle the eviction.
that's why we call it the struggle, you're supposed to sweat
Yeah I've heard a lot of that too. Enough that I can't possibly consider it just a few snippets of anecdotal evidence. I assume property management handles repairs and refurbishments as well?
Is it? I figured that unless it's a real fixer upper or you have particularly rowdy/clumsy tenants popping by once a month to check on things would be enough, if that.
EDIT: A friend just brought up an interesting point vis a vis the whole "use a property management firm to deal with your tenants": What if I Live on the property for a given amount of time? I do have some handyman/carpentry skills so if anything went wrong I'm literally right there to take care of it.
that's why we call it the struggle, you're supposed to sweat
My brother in law tried doing what you're looking at doing, and it just wasn't worth it, and that was with good tenants.
What about screening applicants? Any pro-tips, red flags I should out for?
You've doubtless heard plenty of stories of le evile landlorde twirling his moustache as he lives to make the poor tenant's lives miserable through negligent living conditions. But you are the landlord here, so that's not what I want to talk about. What you rarely hear about however is the "professional tenant", that is until you've had to actively deal with them. The other side of the coin that's just as much the cause of these nightmare apartment stories as landlords are, people who know every trick in the book in the art of property sabotage to make your property look technically uninhabitable in the eyes of the city, with the end goal of living in your property for months or even years while dodging paying any of the rent. All the while spinning to the city and possibly even the local paper about what a slumlord you are, so you look like the bad guy in the entire process.
They'll replace the batteries in the smoke detectors with dead ones and complain to the city your smoke detectors don't work, they'll take the pull chains out of light fixtures and tell the city you didn't provide them with working lighting, they'll switch off the oil burner switch then tell the city you're not providing them with heat and will replace the faceplate with a regular faceplate when the city comes to inspect, so the inspector can't immediately tell why heat's not working outside of just having a negligent landlord. They'll also tamper with the gas meter and in this manner can also tell the city you didn't provide them with heat, and this time you need the gas company to come out to fix it. If you made the mistake of giving them access to the basement they'll go into the basement and attempt to tamper with other things such as the fuse box so they can tell the city that electricity hasn't been working in certain parts of the house - oh also you cannot deny them access to the basement now if you had originally granted them access - that's a no-no in the eyes of the city. The list goes on, but once reported to the city, any single one of these "violations" means they do not have to pay you rent until you fix the problem and it's verified by a city inspector(on the city's schedule, of course) that the problem is fixed. Normally they now owe you the back rent for this time, but if one of these violations just happens to come up every time rent is due...
If you manage to make it to the eviction process they'll try to trick you by offering you a partial payment with a promise to pay the rest of the owed rent - it's a trap, if you accept any money from them you are required by law to start the eviction process over. If you accept cash payments without a paper trail(receipt signed by both parties every payment with a copy for each party), they will lie to the court about how much they've paid. I can go on all day about this - rotten tenants have so many more avenues to rip off a landlord than a rotten landlord has against a tenant.
If you really are serious at looking to rent, it's extremely important you do proper background screenings(credit reports, work history, eviction history, etc.) to head these people off before they even set one foot in the door, otherwise you're potentially setting yourself up for a nightmare of apartment sabotage, arbitration and no income* all the while these people are squatting in your property and you can do nothing about it except when city arbitrators inevitably propose that they're willing to leave and disregard all "violations" on your part(mind all of their sabotage is considered by the city as negligent living conditions on your part as landlord unless you can prove they're causing it) on the condition that you relinquish all claim on back rent owed. And by this point, you'll probably be just so sick of them that you'll take the deal just to finally get them out.
*It's highly recommended you invest in insurance protection against rental defaults, it does exist and will cover lost payments during the eviction process.
Also I wouldn't want to live with people picked out by the agency, since all you'd know about them is they have an ok or better credit score. Maybe it would work if it's an attached but full rental unit, but I'd have to spend some time with someone before I'd be willing to share a fridge.
Actually, are you looking at places that would be separate or semi-separate units, or more like roommates?
Also, make sure you check rents in your area; there's places where this could make you money and others where it's just not worth it to spend extra money for more bedrooms to rent out.
There's kinda boilerplate lease/rental agreements online that serve the purpose, just make sure it covers everything specific to your situation.
Disclaimer: We rent a nearby condo to two of our friends(they pay us directly, with electronic receipts for all), and it has worked out spectacularly well so far. I'm aware that it could have gone much, much worse.
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then you aren't ready for tenants. nobody is ready for tenants who uttered this phrase
sorry to rain on your parade, but you can thank us in 5 years when you're not in bankruptcy court
buy a house you can afford to live in on your own, get a taste of what property ownership is really like, THEN decide if you're willing to endure that x5 for total strangers, indefinitely, forever
we also talk about other random shit and clown upon each other
That but all day every day.
Anyway, the even more relevant question is how you deal with it when Jim-Who-Seemed-Like-a-Great-Tenant loses his job and just decides he’s not gonna pay rent
that's why we call it the struggle, you're supposed to sweat
I’m not making any of these examples up.
If you are renting for the first time get a property management firm.
Something that you may not be appreciating is that even if you have amazing tenants, shit can and will go wrong outside of anyone's control, and you will be obligated to respond in a timely manner, even if you would ordinarily not need to/want to/be able to. And as mentioned above, this is an indefinite commitment. Your tenants (rightfully) will not cut you slack because you're just doing this as a side gig, this will be their home, too.
Unfortunately that's nigh impossible in the part of the PNW I live in. I'd like to pack up and move somewhere cheaper but I have too much tied up here to be able to just drop everything and move, and I'm sick of always having to move every two years because of unreliable room mates.
I'm single, I don't really have any close family, I've got friends scattered all over the place, and I'm sick of the lack of stability in terms of living situation so far. Again, I keep hearing two extremes on owning property, the "Nah, everything is fine, it's easy passive income, just screen your tenants!" side and then this side, where everything is doomed to failure and the house will collapse on it's foundations after the tenants throw a single kegger.
Which is it?!? Either one side is doing something wrong and their investments are getting destroyed or the other side is doing something right to protect their investments.
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I keep hearing that too and I usually expect it, but the last 5 places I've lived had only minor stuff go wrong, and these were older houses too, like, made in 1963 houses and barely kept up to date. Fixing a washing machine or fixing a few leaky pipes was never THAT bad before, so unless something absolutely catastrophic (Which could happen to anybody and is a risk everyone has to take) happens I don't see a huge issue with basic maintenance. It's not something I'm uncomfortable with, I'm not exactly from a wealthy family, I had to learn to fix things instead of paying people to do it for me.
Although it sounds like an on-site landlord is not a good idea, although it would solve two problems in on fell swoop.
Isn't that what legally binding documents are for? I mean, you ink your name on a legal document that states you need to fulfill certain expectations in exchange for room and board, and then fail to meet those expectations, the courts have to side with the law, unless there's some sort of extreme extenuating circumstances.
Hmm, note to self: Never rent to lawyers or people with lawyer-adjacent career paths. I get the sneaking suspicion they would run circles around any legal document.
actually evicting someone is an arduous process, even if they don't attempt to fight you about it. And in the case you're describing, you have to share a living space/facilities/etc while you're evicting them
owning rental property is relatively easy income assuming you can front the cost, because you can contract out the management and basically never think about it. That's not the same as actually being a landlord
that's why we call it the struggle, you're supposed to sweat
the problem is that the risks are hard to assess; you won't know if the person you're renting to is gonna turn out to be a weirdo, you won't know how to fix everything that can potentially break, you won't know how to serve a tenant with documents, etc. These are all things that can be learned of course, but at some point you're working a second job
that's why we call it the struggle, you're supposed to sweat
That's the kind of answer I'm lookin' for. Clears up the split opinions at the very least.
Hmm, well, it sounds like my best bet is to get in touch with a property management firm it sounds like. Since I can't front the entire cost of a house immediately it sounds like the first X years are going to be just having the property pay for itself through renters and have this be a long term investment, which is also fine by me if the PM firm runs everything in the background.
Not quite the scenario I had hoped for but you guys have raised some excellent points and I most definitely appreciate the advice.
Any other pointers or traps anyone can think of to avoid?
Unless you've got a very large down payment the first X years are more likely to be the property sucking down cash instead of 'paying for itself'.
fuck up once and you break your thumb / if you're happy at all then you're god damn dumb
that's right we're on a fucked up cruise / God is dead but at least we have booze
bad things happen, no one knows why / the sun burns out and everyone dies
With your situation, ask yourself if, right now, you could budget ~$10k a year, after the tenant income, of repairs. Because that happens with home ownership, doubly when you are renting as they will not care as much about maintenance and breakage.
Really, your situation sounds like a huge red flag for being a homeowner and 100% this feels like a bad idea that will go poorly. Buying a property strictly for renting to someone else, while renting yourself, is likely just going to cost you money more than it will make some. In my market renting a home usually runs about $1700-$3000 a month depending on size, and a small apartment typically runs $800-$1200. After the approximately $400 a month for passive, required upkeep that is on the landlord to do to attract good tenant (lawn and property maintenance, pest control, and ~$200 lock-away for assured big issues like roof replacements, appliances, etc.), you might, maybe, have somewhere between $800-$1000 of income from your tenets on a good month, 20-30% of which will be taken by the property management company.
So maybe $700 a month of income, which has to go back towards that mortgage, insurance, and property taxes you'll have which will probably be in the $2000+ a month. Not to mention your own rent for living elsewhere.
An idea landlord situation is when you own one house, can buy the house outright, cash, and then have enough income after to cover the property taxes and the property management firm out of pocket, and then use the rent to cover all maintenance and upkeep for both of your properties. You aren't there, and this will likely backfire and cost you more in the long run.
I'd, not advise that. Why not buy house, live in it and pay mortgage and possibly have a renter(s) pay rent that covers part of your mortgage payment and other costs? You might be able to get your monthly costs down below what you currently pay in rent, plus more equity in the house each month (keeping in mind some of the lost money is repairs and random stuff you need to buy to maintain a house).
So I think what several posters above are trying to warn you about is this. Those unreliable roommates? Remember how that sucked and you had to pack up your stuff and go? They're inside your house now, and it's going to be waaaay more hassle to make them get out instead. An airtight contract is great; I'm totally sure you will knock it out of the park in small claims court! 2 years later! But right now the rent has been overdue for three months, they won't voluntarily vacate the premises, despite what your contract says your local laws say 6 months so you can't get the police yet.
I'm not as familiar with using rental agencies as other people, so happy to be corrected here. But my understanding is that they do not protect you from loss of income if a renter decides to not pay rent or damages the house. All they do is the credit checks, try to keep the property occupied as much as possible, and arrange for repairs (and pass the bill to you).
Rental Agencies are not the same as property management firms.
Rental Agencies just vet renters and put people in the house, for a fee. The Fee is usually 25%-50% the first months rent. If the room rental rate is 800 bucks they would take 400.
Property Management firms, vet renters, rent the house, fix the house clean it for new renters, collect the rent, evict non performing renters, and/or provide insurance for if a renter damages. Depending on how much risk exposure the owner wants. And they charge a fee per month for that. The fee for that is between 8% and 20% for an 800 dollar fee, with no risk they would be charging 160 bucks a month, but would take care of everything.
There is also an advantage of disclosure, the contract would be with coldwell property management or whatever, and they may not know who the owner is, so if 3 roommates are contracted with the same property management firm, them not knowing the 4th roommate is the owner, has a certain appeal to it.
(Both of which have happened, multiple times, to different landlords I hang out with).
hmm well who is the side telling you how great it is?
Are they multi-millionares? How large is their real estate portfolio? How many people do they have working for them who do work related to maintaining rental properties? Do they have an accountant? A lawyer? Do they have general contracting connections that enable them to maintain their properties below market value? These are some of the questions you'd like to be able to answer positively to before tying a rental-property-shaped anchor to your finances
You have none of these. You're just a dude who needs a mortgage so he can buy a house he can't afford. The property manager you pitch this idea to will feel the same way, and have questions, including ones about whether or not they're even willing to manage a leveraged single-family property THAT YOU ALSO LIVE IN.
The core issue here is not *that* you want to rent out rooms. Many people do, successfully
the issues are
* You have no property ownership experience
* You evidently need this to work to be able to pay the loan you have to take out to get the building
* You seem to have some really weird off-key sentiments about your would-be roommates that make it sound like you're not ready on any dimension to become embroiled in painfully binding financial and social agreements with random strangers
These are serious red flags which any reputable property manager will pick up on immediately.
Good luck to you
we also talk about other random shit and clown upon each other
Fair points, but how is someone supposed to GET property management experience without, y'know, managing a property to begin with? I don't come from money, so I can either take the plunge or spend the rest of my life renting. I can't find room mates that can keep their shit together long enough to stay in one place for more than two years at a time which seriously fucks with my ability to complete my degree (Which is also zero guarantee of a better paying job these days anyway) And with rent prices only increasing year by year it makes more sense to get in on a good long term investment that willl, if not now then eventually, bolster my financial independence to the point that the next time Johnny McBadIdeas decides he's going to inform everyone he's not renewing on the lease less than a month before it's up because he and his out of work significant other want to move to a MORE expensive apartment and have a kid on his minimum wage, low-skill job with no medical insurance, I won't have to worry about having to sacrifice next quarters school money for the security deposit and the first + last months rent on a new place, after paying the movers. And the pet fees.
While I'm up on my soapbox, fuck you Jeff Bezos for turning this place into Wet California.
And those people are not multi-millionaires, no, just regular people who started buying and renting properties before the market got inflated.
Yeah, that first part seems, on paper, like it'd be the safest option.
Still, I'm not necessarily looking to jump on a property literally right stat now ASAP. Also I have an absolutely stupendous credit score, so it's not like I'm so desperate to jump on the deflating housing market before my illiquid assets burn a hole in my pocket. I just want either A) a good long term investment,
Ugh, here I go grumbling again. I gotta stop working myself up into a froth. Just... God damn PEOPLE, y'know?
So I figure I can front the 20% or so down payment and be ok, maybe I can argue them down to 10% since I have such good credit. Then I can either buy my own place and rent a room(s) out which, while economical, people have stated carries the potential nightmare of me having to be personally responsible for and landlord for possibly the same flaky-ass roomies I've been dealing with already.
OR...!
I buy a house I don't intend to live in specifically as an investment vehicle, which an above poster claims after taxes, insurance, and the 20% cut of whatever PM firm I use, I'm looking at MAYBE 700 USD at most, minus anything that needs to go to repairs, and this is assuming I'm renting elsewhere too. (Correct me if I misread that, it's late for me)
At least two (Three?) of you guys brought up Red Flags on my part, all of which hinged on my lack of experience as a landowner/landlord/property manager. But again, I ask you, how else am I going to get experience DOING that stuff in the first place? I have neither the time nor the inclination to work as a real estate agent or a full time carpenter/landscaper, and I come from poor ass motherfuckers who couldn't manage their money wisely enough to buy their way out of a paper bag on a fixed thirty year loan.
Unless you guys know of an alternative possibility here, I'm not seeing any other way to get in the property game outside of completely changing careers, throwing the last 5 years of school in the garbage and once again saddling myself to unreliable roomies. Are there ANY other options I'm not seeing here? Anything I can do to mitigate the possible red flags I've raised?
by staying within your means, growing your net worth, and making financial deals from a position of strength in the due course of time
here's how you DON'T get experience doing that stuff: getting way underwater in your first house and spending the next decade digging yourself out instead of making money
there are so many things that can go wrong for you that they exceed the scope of even this thread. if every guy with 30 g's in checking could become Duke of Portland, then we'd have a much different society. there are reasons this is not the case
A way better move for you would be to buy a residence BELOW your means, live in it alone, pay the everloving shit out of the mortgage, and then borrow against your home in the future to make a real estate play... that way at least if it goes tits up, you just have another mortgage to deal with, instead of your life being ruined
I offer you these perspectives as someone who works at a conglomerate that manages a vast portfolio of residential and commercial property. There is nothing easy or quick about it. Also while you're saving more money, go hang out at bars where lawyers hang out at, and see if you can make a lawyer friend. Never a bad thing to have if you're looking to get into property.
I have nothing else to say about this
we also talk about other random shit and clown upon each other
If you can afford a home or condo for yourself, that's one discussion. It makes perfect sense to buy when you have the credit, savings and income, can manage the upkeep, insurance, taxes, and maintenance for yourself, and live with peace of mind as you figure out the complexities of home ownership.
If the discussion is "I want to buy a house to make money through rent" you are not in a situation to do that successfully.
(Also, reread my post concerning the $700. That's $700 from your tenants to go back towards your mortgage and your own rent. Meaning you are still likely underwater).
I bought a small 3-flat building as my first property ever. We moved into the owner's unit on the first floor, recently did a cosmetic reno on the second floor unit and got a new tenant there, and inherited a tenant in the attic unit. We pretty much lucked out with the great attic tenant being a 74 y/o quiet guy. Rent is below market, but stability is king in owner-occupier rental property. Time will tell if our first tenant on the second floor unit will pan out, but we did our due diligence with a comprehensive background/credit check through TransUninion's www.mysmartmove.com and made sure to really talk to the tenant and get a feel for them as a neighbor. Beyond that I've done all the reno work myself, and plan to do 90% of the maintenance work myself.
You need to be handy enough to fix most things, or you're going to get eaten alive by your maintenance bills. There's a lot of wear and tear involved with tenants, so if you're constantly dealing with paying for repairs, you're not going to have any margin at all, and might lose money when combined with vacancy. Can you paint (and have the job flexibility to do so)? Can you repair drywall yourself? Can you do minor electrical like replace outlets or light fixtures? Can you do minor plumbing like replacing faucets? Can you install window treatments and covers? These are usually the #1 damaged item along with drywall and light fixtures. If you can't do all that yourself, then before you even consider buying, learn how.
Do you know your state and local landlord tenant ordinances? You need to know those inside and out before you get sued by an angry tenant. Beyond that, do you know how to take someone to eviction court if they won't leave/won't pay rent? You gotta know how to do that. It's illegal to just carry their shit out and change the locks. Attorneys are expensive.
Beyond that is the fact that you need to apportion at least 20-30% of your rent towards savings for maintenance/vacancy. If you can't swing those margins and still make your payments, then whatever property you look at just won't make sense.
I get that it's hard to see other people doing it, and that you want to do it too. But these people have experience that you don't, and know what to do when shit goes wrong, because it can and will go wrong, and you need to know what to do, beyond just going to an online forum and asking what you should do. If you have any other questions though, about how to prepare, get financing, when to feel prepare enough, etc, feel free to shoot me a PM.