I’ve always been an entrepreneur at heart.
When I was 7 years old, I bought a large tub of Redvines Licorice from Costco, individually wrapped 5 pieces together in saran wrap, and then sold them to kids on the playground for $0.50.
Now, purchasing real estate and selling licorice on the playground are two very different things. But they both make money, and so in my mind, they’re closely correlated.
Three months into our marriage, my wife and I purchased our first duplex. Three months after that, we purchased a second duplex, for a total of 4 units.
Having no real formal training, most of what we knew about finding and screening prospective tenants, creating contracts, signing leases, and managing our properties was all learned from the internet.
Most of the people we talked to thought we were crazy.
After a couple months, despite our lack of experience as landlords, somehow we made it work, but not without mistakes.
Despite having BiggerPockets on my side, nothing could prepare me for what I was about to encounter as a real estate investor. It came with challenges and victories I wasn’t prepared for.
Here are 8 lessons I’ve learned about real estate investing to help you avoid some of the unnecessary pitfalls that I encountered.
1. Keep an eye out for deferred maintenance
Unfortunately, it seems to be the case that most rental properties take on a lot of abuse. With the consistent turnover from tenants, and the fact that it’s not their home to begin with, it takes more of a beating than say your primary residence.
Personally, I think one of the main reasons for this is property management companies. It’s rare to find a property management company that goes beyond their basic expectant duties of collecting rent and replacing tenants. One thing that very few property management companies do is be on the lookout for long-term maintenance, such as roof replacements, or regular furnace cleanings.
When you’re looking to purchase an existing rental property, be on the lookout for things that have been let go for many years. If you don’t address them before the purchase, they’ll soon become your problem.
We were a little too excited
The first property my wife and I ever purchased was a single family home. The numbers on this deal were just too juicy to pass up. The reason for that is because in addition to the home we just purchased, there was also a “freebie” sitting in the backyard — a trailer that could be used as a rental as well.
The numbers worked out so incredibly well on this deal, that we couldn’t help but jump on it.
Going into this property, we knew there was going to be a significant amount of work needed on both the house and the trailer. It would need paint. It would need plumbing work. It would need new carpet. We knew an entire bathroom was going to have to be remodeled, as the entire floor was rotted out. There was even an entire bedroom that would need to be sheetrocked.
Needless to say, we knew we were signing up for several weekends-worth of work, before either of these places would be rent-able.
Now, because we were so caught up in the numbers of the deal, and trying to negotiate a price, I’m sad to say that we had our blinders on. We were so focused on the immediate interior repairs needed, that we were completely oblivious to the yard work and other exterior repairs necessary as well.
Outside, sitting between the house and trailer, was a 100-year old Oak tree, at least 100 feet tall. It was massive.
Due to an apparent windstorm, there was an entire tree limb that had broken off, and was delicately lodged in between two other tree limbs. When I say “tree limb”, I don’t want you to picture a few twigs. This was a log, the diameter of my head, that easily weighed 1000+ pounds. And lucky for us, it was angled directly above the master bedroom of the home, ready to dislodge at any moment.
We knew that this was a serious safety concern. Unfortunately, we didn’t even think to address it until after we closed on the house. We were getting estimates of $2,000+ for tree trimming to prune and remove this log.
Knowing that would wipe out nearly all our profits for a few months, we decided to attempt the removal ourselves.
It required an elaborate system of tying multiple ladders to the trunk of the tree using ratchet straps, and then creating a make-shift pulley system, which was tied to a winch, attached to my pickup truck. We then used a chainsaw to cut the limb free and slowly lower it to the ground using the winch.
Needless to say, it was a project. It took us two Saturdays to complete, and was a major headache.
This was something that became our problem, simply because we refused to address it in the inspection contingency prior to purchasing. This was the original owner’s problem, and it shouldn’t have been ours.
Lesson learned — don’t overlook existing issues because you’re overly excited about the deal.
2. Ask prospective tenants about their credit and background before setting up a viewing
Most of the properties we’ve purchased have come with existing tenants. We figure, “Hey, if we’ve already got tenants, no use in kicking them out unless they’re causing problems.” In one unit, however, it had been vacant when we purchased the property, so we needed to get someone in there quickly.
I posted the vacant unit on both Craigslist, Facebook, and a few other sites to drive the most traffic. We had lots of interest, and I set up numerous apartment showings.
As people walked through the unit, I would casually ask them about their employment, credit, and background history.
I was incredibly surprised by the amount of information people were willing to divulge. One such person admitted to having multiple felony charges, beating up previous neighbors, and eluded to a large settlement he received from suing a past landlord.
75% of the people that I showed the apartment to did not meet our criteria. Most of them required housing assistance, or had credit scores in the 400’s.
I wasted countless hours showing our unit to those who would never qualify. My intial mindset was, “Let’s get anyone and everyone that’s interested to walk through our unit, so we can rent it out as quickly as possible.”
Since learning this, I now change the way that I approach prospective tenants.
I now post our requirements in the ad, giving specific background and credit criteria.
Even still, when people message me (typically on Facebook Messenger), I ask them again what their background and credit look like.
This whittles down the number of prospective people significantly. Once I find someone who does meet our criteria, I will then set up a date and a time to show the unit. On the date of the appointment, I then send an additional “reminder text” an hour or two before the showing so I’m not sitting at the unit for an hour, waiting on a prospective tenant who may or may not show up.
3. Set odd lease lengths, so leases end during warm months
Typical lease lengths are 12-months. I don’t have a single tenant that has a 12-month lease.
The same unit mentioned above, sat vacant from Thanksgiving, until three weeks after New Years. We had reserves to cover the vacancy, but it was still wasn’t ideal.
I called up one of my real estate mentors at the time and asked, “Why is this unit so hard to rent out? It’s nice, clean, updated, and perfectly priced. It should be a slamdunk!” He replied with, “Time of year.” He went on to say, “The only people who want to move over Christmas, are those who are being forced to move/evicted.” He then let me in on a little secret: odd lease lengths.
He explained to me that with any tenant he has, he makes sure to stagger their lease lengths so that they end in the warm months of the year. Nobody wants to be moving in and out of an apartment, moving furniture with snow on the ground.
We now do just that. We have some short lease lengths, such as 9 months. We also have long lease lengths, as long as 17 months, to ensure that leases end in warm times of the year. We also ensure to stagger the end of leases so that we don’t have all of our leases come due in June, and have a high rate of vacancy.
By ensuring leases end in warm months of the year, we have a significantly higher pool of quality tenants to choose from.
4. Before purchasing a property, talk to existing tenants
When I first began my journey in real estate, I had this weird feeling about looking at prospective properties while tenants were home. I’m not sure what it was, but I just didn’t want to deal with it. I wanted to be able to walk through the property at my leisure, and not have to associate with anyone. I felt that it distracted from looking for leaks, or cracks in the foundation.
I was an idiot.
Tenants are a treasure trove of information. Nobody knows the property better than they do.
They know where the leaks are. They know the creaks and the strange sounds. They understand what needs additional insulation in the winter months.
And the best part? They’ll tell you about everything. There’s very little loyalty to the property owner.
I now make sure that I look at prospective properties when tenants are home so that I can ask them specific questions.
“How have you liked living here? Is it clean? How’s the owner? Does he/she fix things when you ask? How often do you see them? How long have you lived here? What are your utilities like in the winter and summer months? Have you had any water leaks?” The questions go on and on.
Speaking with one tenant saved me from shit’s creek (literally)
I once found a 4-plex investment property for sale that, at first glance, looked to be an incredible deal. Asking price was $140,000 with $1,900/month gross rents.
I set up an appointment to view the property. On the day that I showed up, there were 12 other investors that showed up as well. We all split up, and so three investors, as well as myself, started by viewing the basement unit.
It was very apparent that there was significant amounts of deferred maintenance on this property. But that’s not the end of the world, in my opinion. I’m okay with getting my hands dirty.
As I was walking through, I started up a conversation with the tenant that lived in that unit. She didn’t speak a word of English. And lucky for me, I speak Spanish. I began asking her my same set of questions — “How have you liked living here, how long, etc.”
After getting past the pleasantries and “fluff” of the conversation, she told me that about every six months, they would have major problems with the toilet. The sewage would back up. And not only back up, but overflow from the toilet. Because she was in the basement apartment, all of the sewage from the other three units above her would compound and overflow from her toilet.
I asked her, “Really? What does the owner do about it.”
“Nothing”, she replied. “I guess the problem has something to do with the underground sewage line to the street, and it would cost $20,000-$30,000 to fix it. So he does nothing.”
Annnnndddd that’s where the definition of “slumlord” comes from.
I ran away from that property as fast as I could.
I’d like to think that an inspection on the property would turn up something like that, but you never know. I saved myself a world of hurt, headache, and money by speaking with the existing tenants.
5. You are “Property Managers”, not the “Property Owner”
If, or when, you visit your properties, if a tenant asks if you’re the “owner”, simply respond that you are the “property manager” instead.
It’s not a lie.
You are, technically, the Property Manager. You’re also the Property Owner, but you play both roles. And the tenant doesn’t need to know that.
By telling tenants that you’re not the owner, it helps place a level of protection between yourself and the “owner”, even though it’s the same person.
I can’t tell you how many times I’ve gone to a property, seen a mess out front one of the units, and had to tell them, “Look. You need to clean this up. Sorry, I know, but it’s the Owner’s rules, and he’ll be mad if I don’t make you abide by them.”
By placing the blame on the “Owner”, it makes it significantly easier to pass the blame onto someone else. And, because the owner isn’t there for the tenant to dispute with, there’s nothing that can be done.
6. Keep emotions out of it. This is a business deal.
This lesson, I actually learned long before purchasing my first rental property.
Growing up, my parents moved us into a newer, larger home as our family grew. Rather than selling our previous home, they kept it as a rental property.
My Mother is the kindest woman on the planet. And as such, she was never fit to be a landlord.
Tenants walked all over her. They were consistently late on rent, were months behind, but my mother just couldn’t stomach the thought that she would be “throwing someone out on the street.”
A year later, my parents finally evicted the tenants. When they finally got the house back, they calculated the damages at $35,000. The tenants had melted the siding on the entire backside of the house when their barbecue caught on fire. They spray painted perfectly good cabinets black with rattle cans. They literally unbolted the toilets from the floor and taken them with them.
I learned my lesson then and there that real estate is a business, not a charity.
At the first sign of non-payment, we tack on a late fee to their rent. Three days after that, we post the eviction notice on their door. Three days after that, if they either haven’t paid rent or left the property, we get the eviction process started. Plain and simple, that’s all there is to it. I refuse to have the same experience as my parents, because I don’t have $35,000 to sink into a property.
Leaving emotions out of it is the only way to survive in this business.
7. Networking is everything
Without networking, I can promise you that we would not be where we’re at currently in this business.
When we began our journey with real estate, we were really clueless on where to go and who to talk to. I searched BiggerPockets for a local meetup in our area, and found a small group of investors that met once a month on the second Thursday. This single-handedly has changed our investing careers forever.
We met a realtor who brought us our first deal.
We met with a property inspector who owns 63 rental units of his own. Not only has he done all of our inspections for every property since then, he’s been an incredible resource with any question we’ve ever had.
We now have a group of like-minded individuals with whom we can bounce ideas, and can potentially partner on a syndicate deal, should we ever want to.
The possibilities are endless.
The real estate business is competitive enough as it is. When you have like-minded individuals, you’re much more likely to be successful, because chances are they’ve run into the same issues that you currently have.
8. Be over-conservative with estimates
We once purchased a duplex. A month after closing, the basement flooded.
It turns out the the concrete in the foundation had slowly deteriorated around the sewer pipe going out to the street. As the snow began to melt outside, water drained inside of the unit and into the basement.
It cost us nearly $1,500 to patch up the hole, extract and dry out the water, and replace the sheetrock, carpet, and trim.
And I’m grateful it only cost us $1,500. It could have been significantly worse.
I see many people on reddit or other real estate forums that say, “Does this property work? After paying the mortgage and all other fees, I’ll have $150 cash flow per month!” If I had margins that were that razor thin, that simple repair would have wiped out 10 months-worth of profits.
I’m sorry, but the headache of real estate isn’t worth $150 in net monthly cash flow.
When it comes to estimating costs and profits, we are extremely conservative with our numbers. It’s not about if something will happen, but when. If you aren’t setting aside at least 10% of gross rents for maintenance and repairs, you’re in for a world of hurt. As a general rule of thumb, we calculate 20% of gross rents for maintenance, repairs, and vacancy on all of our units.
If, after reviewing these numbers (and accounting for maintenance and vacancy), we can’t make at least $200 net per door, we don’t buy the property.
After all, we’ve learned to fall in love with the deal, and not the property itself.
It would be difficult to include all of the lessons we’ve learned over the years. I could easily compile a list of 100+ lessons we’ve learned (and if there’s interest in that, I’d consider writing it), but these are the ones that immediately come to mind.
As we continue our real estate venture, I’m sure I’ll learn infinitely more.
Have I missed any? What are some lessons you’ve learned as a landlord?