Saturday, May 16, 2009

Rental Property

In my last post I alluded to renting out my current home while I am away. Doing this would be interesting from the perspective of the fact I would be striking out into very new territory.
as I spoke about in my summary of my financial past, I owe most of my money habits to my wonderful family. I wasn't even 10 years old when they decided to teach me about the stock market by having me buy a handful of shares. I researched lots of companies that made things I liked, and eventually bought 10 shares of Disney. Shares I still own today, after a number of splits.

My family invested their money in stocks and mutual funds of stocks and bonds. They keep their money in checking, savings, and money markets. But no one in my family owns rental real estate. This is a field where it is probably possible to become very wealthy, but it is also a field where it is very easy to shoot yourself in the foot and go bankrupt. It is full of scam artists and hype, along with some very real advice.

When I started getting interested in rental real estate I started doing some research and found a number of sources - my favorite 'finance guru' had a book on the subject "Clark Smart Real Estate" which I have read cover to cover a number of times. I also picked up a few random books in Barnes and Noble and thumbed through them. Online I follow the adventures of "Meg" with her WealthIsGood blog. On the radio there are a number of programs in my area by a group calling themselves LifeStyles, whom I have decided have some good ideas and some I disagree with fairly strongly.

Still, I'm interested in gathering ideas and thoughts on rental real estate. Here is what I have gathered from my research:
  1. Credit and Criminal check every occupant over 18. A minor blemish need not disqualify them, but look for trends and obviously prefer things to be cleaner. Consider the nature - a credit collection on a card but a perfect rental history might suggest someone who pays their rent before their other bills, which would be a plus for you
  2. Make sure the security deposit is not exactly a month, otherwise the tenant might think it is the 'last months rent' and leave you short when repairs have to be done
  3. Get a home warranty and write a "tenant deductible" into the rental. This accomplishes two things, the first is that it means the tenant won't call you for extremely minor problems (change your own light bulb, thank you). The second is that it limits risk - you generally only have the difference - if any - between the warranty and tenant deductible if something does happen.
  4. Be tough early, nice late. Be extremely picky about picking out tenants, but if you have a good tenant who runs into trouble you can get a lot of loyalty by being understanding if something happens later. Of course, don't forget it is a business and you need to be paid.
  5. Don't hesitate. Start the eviction process as soon as you are able to if the tenant is late, because even in the best of circumstances this can take time to go through. Hesitating will only give bad tenants the impression they can get away with it and leave you without rent longer. If they pay up, you can drop the process.
  6. Keep rental houses on the cheaper side of the market. There are far more renters below $1000 than above, for example. If you get too expensive, you start requiring incomes that are more able to purchase a home which reduces your potential pool of tenants and could result in long vacancies.
  7. Don't leverage yourself to the hilt. While leverage can help increase profits you are taking some major risks - the more the leverage the less number of 'bad things' that have to happen in a short period to turn a cash flowing set of homes into a horrible story.
Does anyone else have any hints on how to run a successful rental property? I'd love to hear them! Anyone have horror stories? Also welcome!

In my own particular case what concerns me most is the distance -- I would be several states away from my old home if I turned it into a rental. There are a few ideas I've had -- hire a friend to check in on the place for a few bucks a month for example. Does this seem like 'fundamentally a bad idea' or does it seem workable? I'd hate to give this place up; I really love it because of all the work I did making it perfect, but I don't want to get myself in trouble with it either.


Anonymous said...

Have you considered hiring a property management company?

Stolid said...

Anonymous: I have, but in general I've found these companies cost a ton and more oft than not make it a losing proposition monetarily. I've also heard lots of stories of what had every sign of being stand up property manager's being underhanded (you pay for nice X, they buy cheap X and pocket the difference)