Being a landlord is not easy. We are typing up a few posts that hopefully will help you as you think about being a landlord. It can be a great business model, but it also can destroy your wealth. This post will give a few stories and will end with some tips on minimizing risk.
[Budget Tips at the end of this post… a budget can protect your equity….scroll to the bottom]
Tenant Destroyed My Home!
A client gave me a call. She wanted to sell her house, but her roommate had destroyed the home and it was not in condition to sell on the market. The house was only 15 years old, but the damage done to the home was upwards of $70,000 to repair. It had animal feces, all over the floors and walls. The smell was so bad my contractor left the house and would not go back in to finish the estimate. House full of fleas as a special kicker to the mess, and this house is not one that could be listed on the market easily. It was also such a large project, that she could not do it herself. She did not have the time or finances.
How did such a new house get to this condition? The owner let a roommate move in with her. Her family then starting having health issues so she spent a lot of time with her family. When things got better, she went back to find that her roommate had been ‘rescuing’ animals from the pound. There were so many animals, and they were so miss-treated, that they had destroyed the inside of the home…. And they destroyed the one that that this lady owned of value. The lady had stopped paying rent, and would not move out. The animals were taken away by animal control, and she had to evict the lady who was now a squatter. Why would someone leave when they have a nice home and are not having to pay for it?
This was an extreme story, but I have been in homes where tenants never reported a hole in the shower wall, so the floors and walls all rotted out. I’ve even had a tenant who did not think to mention the water spot on the ceiling until the ceiling caved in on their car (long term roof leak), or a tenant who did not replace the air filters and damaged the HVAC system. The fact is, tenants will never respect your house as much as you do. To them, it is a place to be used, and not an asset to be taken care of.
Renting out a home is not something that should be done lightly. A business plan and a reserve fund must be kept. There will be years where repairs will wipe out all your profit. To be honest, it will take several homes before consistent profit will be found. Some numbers indicate that you need 10 paid for homes, or 20 with mortgages.
If you plan for and expect these issues… then there are no surprises. It is just the cost of doing business. If you don’t have the time or energy to actively manage and check on your properties, renting your home might not be a good idea. Many investors that flip properties will tell you that they hate being landlords. Being a landlord is not for everyone… so take stock and see if you should be renting or not.
Expenses all landlords should have budgeted:
- Debt Service (mortgage payment)
- Property Taxes
- Insurance… even special insurance if you are vacant for more than 30 days
- Short term repair costs
- Saving for long term repairs (the roof will wear out, or you might have an insurance claim and need to pay a deductible)
- Utility costs
- Vacancy costs (time you are not collecting rent is an expense)
- Eviction costs
Vacancies and repairs do happen. It is not if they will happen, but when. So you need to budget for them. Here is a very general budget that I suggest. Divide out the rent into these categories and set these aside as soon as the funds come in:
10%-15% for repairs
10% for vacancies
10% for taxes (in Texas)
10% for insurance
~50% of your rent will go to these categories. That leaves 50% to pay a mortgage, property manager, and then the rest would be profit.
Also, I highly suggest getting a fund set aside ASAP that could pay the full deductible on an insurance claim. I try to get a reserve account up to about $5000 per property.
Tired of being the landlord? Don’t wait until your tenant destroys your property before you take action to get out from under the property. Don’t let them destroy the equity you have built up into that home.
Enjoy being a landlord? Great, don’t treat it like a hobby, or set it and hope it takes care of itself. Treat it like the business that it is. Grow the number of properties that you have, and you could find a nice retirement once you get the loans paid off.