From clogged toilets to cash flow wins, here’s what it really takes to succeed with rental properties.
My wife works in health care, and as a result she can tell riveting life-and-death stories. I write and speak, and as a result I have met interesting people and done pretty cool stuff.
But no one ever asks us about those things. Instead, people are fascinated by our rental property business. We own a number of residential properties and are developing a neighborhood that will eventually include 15 to 20 single-family homes that we’ll rent, not sell.
We’ve learned a lot along the way about real estate, and business, and people, and ourselves.
Here are some of those lessons.
You Want Active Income, Not Passive Income
The return-on-hassle spectrum is a measure of the difficulty/hassle/effort involved in a specific investment or activity against its anticipated or actual return. Stick your money in an ETF and there’s no hassle at all.
We could pay a property management firm to reduce our level of hassle, but that would significantly reduce our net return. Showing properties to potential tenants, checking credit and references – those things are fairly easy. Plus, showing properties ourselves is much like job interviews in that it helps form a positive landlord/tenant relationship.
As for maintenance and repairs? Sure, it would be less of a hassle to have a property manager take those calls, but ultimately we still pay for the work done, and we, unlike the property manager, have a vested interest in doing so as efficiently and effectively as possible.
Nor would the skilled craftspeople have a relationship with us; their relationship would be with the property manager. Then there’s this: more often than not, since I have a reasonable range of skills, the cheapest method is for me to do the work. (I’m happy to spend 10 minutes replacing an HVAC condenser capacitor to save the $200 technician fee.) Granted, the hassle involved is much higher — but so is the return on that hassle.
Does the average real estate investor buy, rehab, maintain, and manage fifteen-odd rental properties while also working full time? Probably not. But since we’re willing to do what plenty of people are not — and because my wife is an extremely savvy real estate investor — our return on hassle factor is high.
You Make Your Money During the Month, Not on the First of the Month
Here’s a story Jerry Seinfeld tells about Chris Rock. As he gave a young comedian advice about building a career, Rock asked, “What do you do during the day?”
“I hang out,” the comedian said. “I don’t do anything during the day. But I do open mics every night.”
“During the day is when you make the money,” Rock said, referring to writing, developing material, and crafting sets. “We collect it at night, but we make it during the day.”
The same is true for being a landlord. You collect your money the first of the month, but you make it during the month: answering phone calls, doing repairs, taking care of admin — that’s where you make your money. Think of it that way, and even something like getting that rare call at one in the morning about a water leak won’t seem like such a big deal. It’s just part of the job.
Know Your Role…
I like to say that my wife is management, and I’m labor. She analyzes opportunities. She negotiates. She handles all the finances and accounting. She shows properties, manages tenant relationships, works with localities on zoning and infrastructure — she’s the brains of our operation.
I fix, renovate, and build. Occasionally, I’ll dip into her side, and she into mine, but for the most part that’s how we divide our efforts, and it works really well.
…and Constantly Expand Your Role
With time and experience, we’ve gained a fair bit of skills. She has an MBA, and got a realtor’s license in order to facilitate our purchases. I have a Class A contractor’s license because it streamlines the permitting process and lets me serve as the general contractor, instead of having to pay one. We wouldn’t have gained the skills we have if we had turned our business over to a property management firm. And we wouldn’t be nearly as good at what we do, which adds an extra layer to our return on hassle.
Sometimes, the Opposite of What People Say is True
Occasionally a prospective tenant will spend considerable time trying to convince us they’ll pay their rent on time.
Usually that means they won’t. As Margaret Thatcher once said, “Power is like being a lady. If you have to say you are, you aren’t.” People who pay their rent on time don’t think about telling you they will; to them, it’s a given. People who will take care of your property don’t spend five minutes telling you all the things they’ll do to make it even better; they just won’t tear things up.
People don’t feel compelled to promise things they habitually do. People who do feel compelled? That’s often because they haven’t come through in the past, which means they’re less likely to come through in the future.
A Tenant’s Personal Problem is Not Your Problem
Occasionally, a tenant will call to say they can’t pay their rent on time. We get it. Stuff happens to all of us. Where it gets complicated is when the tenant tries to play on our sympathies so we give them a break. I definitely struggle in those situations.
But I shouldn’t. If I called a tenant and said, “Hey, I had a bad month, so I need to raise your rent $300 this month to cover a medical bill,” they would think I was crazy. Why is the same okay in reverse? Clearly, it’s not.
Ultimately, a lease is a contract. We always uphold our end of the bargain, and we expect tenants to uphold theirs. While we may empathize, their problems are not our problems, just like our problems are not theirs.
A Product You’re Proud of is Easy to Sell
Occasionally, I’ll show a property to prospective tenants. I’m terrible at selling, but in this case, that’s okay: I don’t really have to sell. I’m proud of the properties we own. I let people in, show them around, and go outside to let them explore and think and talk. If they like it, great. If not, that’s fine. Either way, I don’t have to sell.
If you want to own rental properties, choose properties you would be willing to live in yourself. Not that you may want to live in (you may aspire to larger, or fancier, or whatever) but that you would be willing to live in. We could move into any of ours; we wouldn’t necessarily want to — we’re happier in our home — but we would certainly be happy.
Equity Helps You Sleep at Night
Leverage is often your investing friend, especially if you want to own a number of properties. The greater the leverage, though, the greater the risk (and the lower your margins). Through a combination of smart buys (my wife), inexpensive renovations (me, and tradespeople who like to make side money), and a booming real estate market, we have considerable equity in each of our properties.
Could we tap some of that equity to purchase more properties? Sure. Some people think we’re crazy for not doing it. But knowing we can, if necessary, sell a property to free up cash provides considerable peace of mind.
At this point, that matters more to us than maximizing every drop of leverage we could wring out.
What You’ve Always Wanted to Do is What You Need to Do
Nearly always, someone who finds out we own rental properties says, “I’ve always wanted to do that.” Fortunately, I didn’t have to work through that inertia; my wife made it happen.
If you’ve always wanted to own a rental property, figure out how. Like many things, it’s hard, but also relatively simple. You need a little knowledge. You need a few skills. You need the willingness to save money so you can afford your first purchase.
Most importantly, you need the willingness to see owning a rental property as a job, not a source of passive income, because when you see it as a job, you’ll work — you’ll have to work — to keep improving your skills and knowledge.
Which means you’ll be much more likely to turn your job into a profitable business.
Inc.com is the voice of the American entrepreneur. They inspire, inform, and document the most fascinating people in business: the risk-takers, the innovators, and the ultra-driven go-getters that represent the most dynamic force in the American economy. Founded in 1979 and acquired in 2005 by Mansueto Ventures LLC, Inc. is the only major brand dedicated exclusively to owners and managers of growing private companies, with the aim to deliver real solutions for today’s innovative company builders. Reprinted with permission.