- I bought my first investment property in 2006 with the intention of flipping it, but ended up renting it out when the recession hit.
- I've since bought other rentals, and in my 14 years as a landlord I've learned a few things. First, that tenants are not your friends.
- Also, it's important to stick to your written criteria when choosing a tenant, and never rent to friends or family.
- I also learned the hard way that it can take an incredibly long time to evict a tenant for non-payment of rent.
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I have always been a sucker for passive income deals. The idea of being able to spend some money upfront for a monthly return is something that is really attractive to me. So the thought of buying investment property is something that I investigated early on in my life.
Over the past 14 years of being a landlord, I've learned a few things that I wish I'd known when I was just starting out.
How I got started as a landlord
Before I start, I thought I'd share a bit about how I became a landlord. It probably seems crazy now, but back in 2006, banks were handing out access to loans, money, and lines of credit like candy. At a local real estate investor's meeting, I met a broker who helped me sign up for two $50,000 lines of credit solely based on my employment and credit score. I used those lines to buy my first investment property.
The plan was to fix it up and then flip it to an end-buyer. But by the time I had it ready to go, we were deep into the recession of 2007-2008. All of a sudden, the credit and mortgage markets had tightened, and the people who were looking to buy houses in this price range could no longer qualify for mortgages. So I transitioned into becoming a landlord. I soon bought a second property, and when I moved into a new house, I also rented out my former residence as a third rental.
Lessons I've learned as a landlord
1. Tenants are not your friends
The first thing I've learned is that tenants are not your friends. That doesn't mean you shouldn't be polite and treat your tenants professionally. Nor does it mean you shouldn't expect your tenants to treat you with respect. What it means is that you should remember to keep the relationship separate.
For me, because one of my rental homes is in the same community that I live in, this is important to remember, since we will occasionally see each other around town. In fact, at one point, my daughter and the daughter of one of my tenants were in the same school class and my daughter was invited to her birthday party. Which was at my rental house! Handling the situation professionally avoided what could have been an awkward situation.
2. Never rent to friends or family
Along the same lines, one of the most common pieces of advice given to new and prospective landlords is to never rent to friends and family. While, thankfully, I have never run into a situation where this has bitten me, I know several people who have had no end of trouble dealing with the fallout from renting to friends and family.
Even if you both go into the situation with the best of intentions, the fact is that you as the landlord and your tenant have different expectations and goals. So when an unexpected situation arises, it's quite natural for both of you to be looking out for your own best interests, and that's where the potential damage to the relationship can occur.
I think the only scenario where I'd be willing to consider renting to a friend or family member would be if it was a close relative (like my child) and I was both willing and financially able to eat several months of rent if it came down to it.
3. Always stick to your (written) rental criteria
Another thing I've learned that I have seen burn many other landlords is the importance of sticking to written rental criteria when evaluating tenants.
So many landlords I see try to pick a tenant "by gut feeling." Not only does this potentially open you up to Fair Housing lawsuits, it can also lead to talking yourself into a bad tenant.
I have written criteria regarding monthly income, past evictions, convictions, and judgments, and I stick to it. I rent to the first person who meets all the criteria and pays the holding fee.
4. It can take a LONG time to evict a non-paying tenant
Thankfully, I have only had to evict one tenant in my 14 years. I've had a few others where the relationship has not ended on great terms for one reason or the other, but only one has gone all the way to an eviction. And it took a long time (several months), and Ohio, where I live, is not nearly as tenant-friendly a state as many others.
By the time I finally got the writ from the sheriff, the tenants had already left the property a month or two earlier. I hadn't gone in already on the advice of my lawyer, but by the time I legally and officially got possession, I was left with thousands of dollars of junk removal and repairs on top of the months of missing rent.