Buying our first investment property

[dirtbiker]

Screen your tenants closely. You screen your dividend paying stocks, don't you?
1.While employers rarely give out employee's income and work history, you can ask them if they were a landlord would you rent to them
2. Verify income by asking most recent pay stubs. Compare what they told you on their application.
3. Ask them if they've ever been evicted or sued for non payment. Get answers.
4. Check your county and neighboring county websites for district and magistrate court records. Evictions, criminal acts, drug dealing, DUIs, spousal and child abuse, disturbance of the peace, convictions etc. are all public records. USE THEM.
5) Payment of security deposit and first month's rent is in cash. No exceptions. Future rent can be payable by check or money order. Nothing is worse than giving you freshly updated unit to someone and they bounce 2 checks on you.
6) This is a business/ investment property. They sign a lease, which should be a legal lease for the community it is located in. Part of the lease is YOUR RULES. Like no smoking. OR no fireworks and explosives in/on premises. If they violate, written notice.
7) Do not use this income to buy a boat or move up the chain in vehicles. If they stop paying you, you still have the same expenses, and bigger car/boat payments. Create a cash reserve money market account.
8) Give them a printed schedule of payments. One of my units, the sewage was a lienable, another the garbage was. So I paid those bills and billed the tenant monthly or quarterly. Put it on le schedule so they can budget for that expense. Set deadlines and follow them. If they're late, written notice per your lease and local laws.
9) Make sure your units are safe, clean and in working order when they move in, especially drains. If something plugs up right after they move in, that one's on you. After a month, drain stoppages/plugs, are on them, YOUR plumber of choice.
10) Don't show up at the rental unit in your Porsche, or wearing Gucci. Some folks resent the fact that they're making you rich, and rubbing it in.

These are a few things off the top of my head after being a landlord for 24 years.

All that screening/background sounds like a real pain! Probably why many people end up with bad tenants. Thanks for all this advice. I will put in the work up front to hopefully get good tenants in the end... Though I know nothing is foolproof.

Our goal is capital appreciation. Any positive cash flow will go toward the mortgage. We're fortunate (hardworking) enough to be in a position not to need additional monthly income, so as long as we break even, we'll be happy. No boat or bigger cars for us.

I had not considered what utilities are lienable. I will need to look into this, and then decide how I want to proceed with utilities. I was planning on garbage and lawn care only being included. I may need to rethink this. Thank you for this tip.

I'd resent the fact that I was wearing Gucci or driving a Porsche! No worries here on either of these accounts!

 

[dirtbiker]

As many have already said, screen, screen and screen…. Buy your next one in your Ira, preferably a Roth IRA.
You say you’re handy - that is so helpful for all the little things that come up.
I am a remote landlord and it has been great to have a stable of tradespeople available. Plumbers, locksmiths, electricians, handyman etc. Good luck.
What kinds of rent are you planning on?

A big part of the reason we are investing in real estate are the tax benefits (depreciation, mortgage interest, repairs, etc.), and from my limited research, we would lose this if investing in RE in an IRA.

 

[dirtbiker]

Does the mortgage lender know it will be a rental and that you won't be living there? Usually interest rates are higher for investment properties than for residential properties.

Yes. And yes, they are definitely higher.

 

[dirtbiker]

Rentals are a pita. At least they were for me and my 3 real estate partners. We 1031'd our Illinois office building into 3 Florida condos in 2004. We had a management company for each. It seemed like there was always something that we needed to take care of, even though we had a management company. These deals were about a wash financially - rents covered expenses. And then we sold the condos around 2013 after a slight rebound of the real estate crash and basically broke even.

But I did enjoy house flipping personally. I bought out my sister's half of my parents house in the early 1990's, remodeled it, and sold it for a nice profit. And built our first house and sold it for a nice profit.

I question why OP wants to rent. If it were me, I'd buy a property, fix it up and sell it. Then buy another and repeat, etc, etc. I think buy/ sell is a better option in areas and times where/when housing prices are increasing at a healthy rate.

Our goal is long term capital appreciation and tax benefits. Flipping doesn't accomplish either of those goals for us.

 

[pjigar]

I was planning to add an automatic annual rent increase into the lease contract. Though maybe add some sort of perk if someone stays long term? Not sure how we want to go about this.

I keep rent increase (5%) in the contract but first year and every 2nd/3rd year, I will offer lower rent increase than 5%. Offered rent will be always lower than the market rent. It has a different mental impact when you "reduce" rent after the fact!

You already gotten a lot of very good responses. I will add a few more:
* If you manage the property then you make money otherwise your management company makes money!
* If finding good new tenant becomes too much work (showings, background/credit checks, etc.) then hire a real estate agent for rental listing. I have always done this since agent can do it much more efficiently due to MLS. It costs a month of rent. Do not sign anything with agent other than one time commission. A lot of agents will want you to pay upon renewal which is unfair. I handle renewal contract myself.
* Couple of cardinal rules I follow: Always buy rental which is cashflow positive in the first year. Always buy local rental less than 1 hour drive.
* Cheap houses brings "cheap" tenants. By a decent house in a decent school district to attract decent tenants.
* Landlording is work and it is not free money, but it can be extremely rewarding if you do it right. Landlording is not for everyone.
* I used to DIY all the repairs and renovations in my early years. I still do a lot of small repairs and high value renovations (plumbing, electrical, lighting, etc.). But now I outsource large jobs (flooring, paining, etc.).

 

[dirtbiker]

I was a land lord in the 80s. I think is easier to purchase a good paying REIT.

I've never really understood owning REITs, unless held in an IRA/401K. The dividends are not qualified, and thus are taxed as ordinary income, and there are not tax advantages, and you can't safely leverage them like you can actual RE. The only advantage I have ever seen to REITs are diversification into the RE sector.

 

[street]

I've never really understood owning REITs, unless held in an IRA/401K. The dividends are not qualified, and thus are taxed as ordinary income, and there are not tax advantages, and you can't safely leverage them like you can actual RE. The only advantage I have ever seen to REITs are diversification into the RE sector.

Yep, I agree.

 

[dirtbiker]

I keep rent increase (5%) in the contract but first year and every 2nd/3rd year, I will offer lower rent increase than 5%. Offered rent will be always lower than the market rent. It has a different mental impact when you "reduce" rent after the fact!

You already gotten a lot of very good responses. I will add a few more:
* If you manage the property then you make money otherwise your management company makes money!
* If finding good new tenant becomes too much work (showings, background/credit checks, etc.) then hire a real estate agent for rental listing. I have always done this since agent can do it much more efficiently due to MLS. It costs a month of rent. Do not sign anything with agent other than one time commission. A lot of agents will want you to pay upon renewal which is unfair. I handle renewal contract myself.
* Couple of cardinal rules I follow: Always buy rental which is cashflow positive in the first year. Always buy local rental less than 1 hour drive.
* Cheap houses brings "cheap" tenants. By a decent house in a decent school district to attract decent tenants.
* Landlording is work and it is not free money, but it can be extremely rewarding if you do it right. Landlording is not for everyone.

Our real estate agent did offer this (for one month rental), but we're going to try to keep costs down as much as possible and find the tenant on our own. If this backfires, we may decide farming this out is a good cost in the future.

The school district was very important to us, as we have been keeping an eye on the rental market the past year, and the school district we chose to buy in consistently rented more quickly and commanded higher rents.

 

[dirtbiker]

Thank you everyone for all the replies. I truly do appreciate it.

 

[pjigar]

I was planning on garbage and lawn care only being included.

DO NOT provide any utilities/services. You can't turn off utilities even if tenant defaults in most states.

 

[pjigar]

Our real estate agent did offer this (for one month rental), but we're going to try to keep costs down as much as possible and find the tenant on our own. If this backfires, we may decide farming this out is a good cost in the future.

I would say hire leasing agent for the first time. There is so much to finding a good tenant that you may miss something the first time, which will leave a very bad taste in landlording. YMMV.

 

[Flyfish1]

It seems that, in general, Pennsylvania is a rather landlord-friendly state. However, the town we are purchasing in is a college town, so there are some local regulations that seem to be a PITA, but those are mostly directed toward renting to students, and "student housing" has a whole different set of regulations. This property is too far from the college to be marketable to students, and we don't plan to rent to students. It is in a desirable public school district, and rents are a bit higher in this district as a result.

I was planning to add an automatic annual rent increase into the lease contract. Though maybe add some sort of perk if someone stays long term? Not sure how we want to go about this.

Definitely hire yourself a local attorney. He/she will be very valuable as you start out.

I was a SFH landlord in NJ back in the day with two homes.It was OK until one became a squatter and trashed the home. Never again. That got me into multi family housing and eventually I syndicated a decent sized out of state apartment complex with friends and colleagues as investors. It was big enough to support professional management and ultimately was a fair investment. We met our 7% pref. and had a small gain on sale 6 years later. That led me into private real estate funds , which have been very good- well except one. Diversify by asset class, diversify by geographic location and diversify by manager if you ever take that route. I also have a bunch of REIT's but by far multi family housing has been my favorite. Glad I never got too involved in office properties.

 

[pb4uski]

Our goal is long term capital appreciation and tax benefits. Flipping doesn't accomplish either of those goals for us.

Just be aware that a portion of any long term capital gain once you sell for the depreciation taken will be taxed at higher than the normal capital gains rates. IIRC the lower of your ordinary tax rate or 25%.

 

[surprising]

Just be aware that a portion of any long term capital gain once you sell for the depreciation taken will be taxed at higher than the normal capital gains rates. IIRC the lower of your ordinary tax rate or 25%.

This is the bombshell awaiting me when I eventually sell my rentals. Owned them over a decade now, have been taking depreciation which has essentially cut taxes to 0. But, will have to recapture that depreciation when I do eventually sell, so will get hit pretty hard. IRS has pretty much removed the loophole which allowed you to move into a rental for a couple years and then sell it as a primary. Argh.

 

[Slim11]

Also since you said it was a college town and had a lot of rules for landloards, check to see if they have a rent controll ordinance on the books. This can limit how much you increase rent.

 

[dirtbiker]

Just be aware that a portion of any long term capital gain once you sell for the depreciation taken will be taxed at higher than the normal capital gains rates. IIRC the lower of your ordinary tax rate or 25%.

Yes, we'll be kicking the can down the street, but if we hold onto or 1031 the RE forever, we'll never have to worry about it. We do know that some of the tax advantages are only temporary, but we are trying to reduce our taxable income as much as we can.

Also since you said it was a college town and had a lot of rules for landloards, check to see if they have a rent controll ordinance on the books. This can limit how much you increase rent.

Pennsylvania does not have rent control in the state laws and restricts local ordinances from enacting this.

 

[Tacitus]

Did this too, a long time ago. Some say it is like buying a boat. Best two moments are when you buy one and then when you sell it. Anyhow, good luck. As above quality of tenants critical.

 

[aja8888]

I had a rental condo in Thousand Oaks, CA in the 1980s for about 10 years. It was great, but what made it work was the great tenants we had (2 of them over those years). Choose tenants wisely.

 

[NgineER]

Dirtbiker - I like what you have been stating.

I would advise against hiring out the tenant finding process, especially with 8% of gross income, or more like 25-30% of your net income. As others have stated you are the one who cares most about your property and the tenant staying there. If you have a relationship with a real estate agent, I would be more likely to have them work the process, but otherwise do it yourself.

You should be on site when prospective tenants arrive, I had one tenant show up and she had to climb over the passenger seat to get out of her car as she did not have the funds to fix the door handle on her car to allow her to open the driver side door.
I had another prospective tenant tell his girlfriend (in front of me) that he was freaking out because he had not gone to work since the start of COVID (this was a couple of months in) because he was faking that he had COVID. You should go through this process first before farming it out. The most recent one I had was a guy saying he was in between jobs but was thinking of opening up a pot dispensary. Makes me think there likely will be smoking in the house and maybe or maybe not money coming in...

You should also verify pay stubs and call references and like @Winemaker said, ask if they would rent an apartment to the prospective tenant.
You should also go through public records, search the county or state court records to make sure you catch anything that doesn't jive with you.

Apartments.com has a nice tenant and landlord portal where you can draft a contract (tailored to your jurisdiction have it docusigned etc. Your tenants can pay through the portal at no cost to them or you. You are notified when rent is on its way, so you will know when people have paid. There are no checks to handle which is really nice, no bounced checks at all. You can also do your tenant screening through their portal. They submit their information and pay for the screen; you get the notification when it is complete.

Zillow also has similar features on the screening side, but they are lacking the rent payment and some of the other features.

You should list on both apartments.com and Zillow, from their it is cascaded to another couple of listings and it will show up on zillow. With those features I don't see the value of the real estate agent anymore, the MLS is not really helping IMO.

Some of the landlords in my area advertise on the sidewalk of their apartments when they have availability and I have not seen the benefit of doing that yet, so we have never pursued that.

Feel free to reach out with more questions.

 

[Winemaker]

I always met my prospective tenants at the sidewalk and either walk and talked to and from their car. You can see how they take care of their own property and whether they were on time.

And I always did a drive by of the address they gave, and talked to their previous landlord. But you have to play psychologist to see if the old landlord is saying anything just to get rid of them.

I had tenants that stayed with me for 8,10,19, 21 and a bunch about 5 over my 24 years. They're out there, but YOU have to find them and screen, screen, screen. We made a bunch of money over the years with 3 buildings ( 1 SFH, a duplex and a 4 unit apartment building. The 21 year tenant wore out 3 husbands by divorce, but she was the one who paid for the 4 unit over the years.

 

[Flyfish1]

Did this too, a long time ago. Some say it is like buying a boat. Best two moments are when you buy one and then when you sell it. Anyhow, good luck. As above quality of tenants critical.

I own two boats presently and have bought and sold three before. I would agree with your statement. As mentioned above I did the SFH landlord thing and I was extremely happy when it ended. Best deal for me now are private real estate funds - you get the cash flow the potential appreciation and the tax benefits...just my opinion.

 

[freedomatlast]

Rentals are like anything else. Some people will be successful and some won't. Some will pick the right properties, select the right tenants and do the majority of the maintenance and management themselves. Others won't make the best decisions and it will be a nightmare. Different people have different skills and it's best to get as much information as possible before moving forward. OP is asking all the right questions and I believe he will be one of the successful ones and I wish him all the best on this new venture.

 

[Diogenes]

Some of you folks are... hardnosed business people. As a renter, here are my rules:

1. I research the property's market value. If the rent is even remotely close to the PITI, let alone higher, I walk. Why pay off the landlord's mortgage? If it's cheaper to buy, or even just slightly more expensive to buy, then why rent? The reason to rent, is that it's enormously cheaper to rent. I'm renting, to get a better deal... not because I can't afford anything else.

2. Some background/financial checks are inevitable and proper, but if the landlord starts asking for things like references, I walk. If he doesn't trust me, what reason have I, to trust him?

3. Won't take a check, and insist on cash? I'm going to assume that you're a drug dealer. Bye bye!

4. This is a business transaction, akin to renting a car or a hotel room. Treat me with deference and respect, and I'll treat you with deference and respect. Remember: we both have options. You don't have to rent to me, but I don't have to rent from you.

 

[Slim11]

How would you calculate all the other stuff for mutifamilies? Repair work, inspections , painting after each tenant leaves. Lead paint fees that have to be paid to the state. Your right you dont have to rent from me. And the reason people rent instead of purchase is that they dont have the money to put down on a home. So even if the rent is the exact same as a morgage, people can not afford the down payment or PMI.

 

[calmloki]

Some good things being said here. We've been landlords since the early 80's. First place we bought was going to be a fire department practice burn. Old man had lived there forever - salt crystal mountains either side of the toilet, but looking at what it could be we took it on and did everything, turning it into a little showplace. Took years to make it right, but we rented it for over a decade to the local college dance instructor.

Borrowed against that house and bought another rough house, then a really rough nine unit apartment in the college town. Improvements and upkeep were constant - at one point the gal and I were working on an apartment and realized we had not missed a single day without doing something on the places in over two years. Buying rough places will do that if you want them to be nice instead.
Time went on - we didn't leverage our equity, instead pouring any rental profit and anything beyond living expenses from our job incomes back into the rentals, paying them off as rapidly as possible. All self managed, no reference checks for decades. Mostly worked out, got bit hard now and again. Got up to 53 units at the peak, 48 apartments between 6 locations and 5 rental houses. About my limit to know the tenants and keep things as we wanted them. Everything within a 22 minute radius. As time went by I grew relationships with roofers and carpenters and plumbers - found the people we worked well with; that we could call and count on.

Exit strategy is tough. We were going to start selling a place/year when I hit 60. Oops. Housing crash. Sixteen years later and we are down to two buildings, nineteen units. Buckets of money, but my physical ability is quite suddenly gone. My contact list is now dead or moved or in the sort of shape I'm in. The gal remains gung ho, I hate to sell in another weak market. The places aren't being cared for as I wish. Much to be said for buying stocks and riding them up and down with no ability to affect the outcome. Just not built that way.