In a recent blog we shared some important things to know if you think you want to invest in rental property. As a follow up to that we share real life stories of being a landlord from an investor whose day job is in a completely unrelated field.
He shares these stories so that you can avoid the financial mistakes he made in the past in the name of having “passive income.”
Friend and financial planning confidante Chris has a financial planning practice that largely serves doctors on the East Coast. Many of his clients expressed an interest over time in “passive income,” primarily from owning rental real estate. Many of them follow a blog that targets physicians and offers financial guidance. This blog espouses the virtues of “passive income” in the form of rental property. To better advise his clients, Chris thought it a good idea to invest in rental property himself so that he had first-hand experience in owning and managing rental property. What Chris learned was that there is nothing “passive” about owning and managing rental properties. He also learned some valuable lessons that you should consider if you are thinking of going down this road. We share those lessons here-
Owning one, or even just a few, rental properties will likely mean you manage the properties yourself, between your day job and your life.
Because of the cost of professional property management, it will likely fall on you to manage your properties. This means that when the toilet is overflowing at midnight at one of your units, you’ll be the one to show up and fix it. Chris also mentioned that if you do decide to bring in a contractor to do work on your units, you will find that you are a small fish in a big pond. Your work will not be a priority to a large contractor, so be prepared to do it yourself, or wait.
Finding good renters is not easy.
Regardless of whether he paid an agency for help here, or posted want ads, renters prove to be a challenge and not paying rent a reality more than a few times.
Imagine owning rental property now, in the time of a pandemic. Even in a good economy evicting a bad tenant takes months. There is a moratorium on eviction in many states. While this protects the renter from having to pay rent, it does nothing to protect the landlord, you, who still has a mortgage to pay.
And there are times when bad things happen to good people, but rent still needs to be paid. Chris shared a story where a breadwinner husband passed away from illness, and his only source of income had been an annuity that died when he did. Tragically, his widow had no source of income. To help her out, the widow’s extended family moved in to the house, bringing with them bedbugs. Removing the house of bedbugs became a battle. After not paying the rent for several months, the widow moved out. A new family moved in, only for Chris to learn that bedbugs were still there.
Chris shared another story which underscores his belief that as a landlord you cannot have a conscience. Another tenant of his was a truck driver who owned her own business. Sadly, she wound up having an accident which destroyed her truck and ended her source of income. Not long after, she was diagnosed with cancer. She spent a good amount of time in the hospital, and Chris did not collect rent during this time. For nearly six months Chris did not receive rent, though his expenses for the property continued. When Chris finally got to the point of delivering an eviction notice he drove by the house and heard water running. It was winter and ice had built up by the front door. Chris discovered that the tenant had moved out and turned off the heat. Pipes burst and flooded the house. It cost Chris $100,000 to fix the property, which required him to strip it down to the studs.
There were stories of tenants who filed bankruptcy (they can’t be evicted), who decided not to pay rent, drug addicts who could not pay rent, good people who had bad things happen to them, and could not pay rent.
You take on a tremendous amount of liability as a landlord.
Chris shared the story of one of his clients who intended to buy rental properties that they planned to rent to retirees. What they didn’t realize was that this screams discrimination. You cannot discriminate on age, among many other characteristics, and what might seem innocent, can become an expensive lawsuit.
When it comes to rental properties as passive income sources, Chris believes that there is nothing passive about it. It is incredibly time consuming, expensive, and there are, in his opinion, far better ways to make money. Chris lost money on every one of his six properties but one.
Owning rental property may sound like an easy solution to a consistent income stream. But, it is far more complicated and time consuming than it appears. Chris suggests leaving the rental property investments to large landlords where scale allows for professional management teams, and instead invest in a diversified portfolio that will create the passive income many clients want over time with solid investing. We concur.
If you’d like to learn more about how we help professional women create passive income through a diversified portfolio, please reach out to us.
