People frequently ask me two questions:
- How do I get started with rental property?
- Is it worth the effort?
I think answering the second question may be more important than answering the first. If you truly think rental property is worth the effort, then you can figure out how to get it done. If you are casually interested in rental property, then you may not have the necessary resolve to make it through the many challenges you will face in order to be successful. First, let me address several considerations that you may want to spend time working through to determine whether or not rental properties are worth the effort. Remember, who builds a tower without counting the cost (Luke 14:28)? Hopefully, working through these ideas will help you know if you are ready to invest in rentals.
- There is risk involved. No matter how good the house, there is still some risk involved. There are plenty of reasons that you may face risk, but here are three that I have recently experienced:
- You may not rent the property as quickly as you think. I have had perfectly good houses that were market priced (or a little below) that took a lot longer to rent than I anticipated. It could have been the time of year, another rental property competing against me, or other factors.
- You could have a tenant that doesn’t pay, or worse—a tenant that you have to evict. This can be pretty expensive! Over the past eight years, I have had four tenants that required a lawyer’s involvement to evict and get a writ of possession. Each tenant cost me thousands of dollars. Two tenants we took to court to recoup damages. One of those cost almost $8,000!
- You could have an unforeseen maintenance issue. A few months after I bought a property, which we inspected pretty thoroughly, we had a water leak that cost us several thousand dollars to repair. Totally unforeseen! We had to relocate the property’s tenant to a hotel for a few days until we got everything taken care of. Fortunately, the property was restored quickly, and we were able to get the tenant moved back in after a few days with no additional issues.
- You need to have your spouse on board. It’s critical to make sure your spouse is bought in. If he or she is not on board, there will eventually be conflict. I would encourage you to talk through the items listed here with your spouse and ask what his or her tolerances are on each subject. I would especially recommend that you talk about your spouse’s tolerance for risk. My wife and I are both pro-rental property, but I have a much higher risk tolerance than she does. Talking through these issues with your spouse is incredibly important. You want to bring him or her on this adventure with you! Don’t let this become a wedge in your relationship.
- It is time consuming, especially at the beginning of the process. I think it’s difficult to estimate how long it will take to set up your business and get started. For one thing, you will need to form a LLC, establish a banking relationship, find a realtor, find a good insurance agent, find an accountant, etc. Then, you will need to determine how many properties you want to buy and start shopping. After you buy the houses, you will then need to get them rented and under proper management. This process leads to accounting needs and every system that comes along with that. I have a good friend who recently went through this process (from initial concept to owning four houses) in about seven months. I think seven months is about as fast as you can credibly digest all the information on rental properties and begin managing homes on your own. If you use a property management company, then you can obviously do it much faster because you are buying into their systems and processes. If you start from scratch, I would plan on a one-year time frame to get up and running.
- If you manage your property, it WILL be an interruption to your life. I promise if you are managing your own property, you will get called away at the worst times to take care of something. You will be headed out the door with your family for a holiday dinner and then be diverted to a rental unit to resolve an issue. This is frustrating! If the Superbowl or College Football Playoffs are on, you can count on getting a phone call. Hot date tonight? Plan on an interruption…that’s just how it goes. I may be embellishing a bit, but you get the point. Many times, you can simply ask the tenant if you can come by the next day and it will work out. Or, it may only require a couple phone calls for you to get an HVAC guy to check out a problem or a rodding service to clean a drain. Just be aware that if a tenant calls, you will need to have some measured response if you plan on taking good care of your customers.
My own journey into rental property was really by accident, and I am sure I have made many mistakes that you would laugh at. My mistakes were expensive, but fortunately, I made it through them and didn’t bankrupt my family in the process! I had NOT considered the points outlined above and walked blindly into all of these issues. Doing so put a strain on my family, marriage, and finances. You can hedge against the same mistakes with proper planning, cash reserves, and some general foresight.
To answer the question—yes, rental property IS WORTH the trouble if you have given it worthy thought and planning. Just approach the process with open eyes and a solid plan. Don’t be surprised by these basic issues like I was.