So You Want To Be A Landlord?

What a great idea, but read this first and learn from some of my mistakes and near misses.... In this first of a series of articles on land lording, we'll look at avoiding the trap of buying properties with inflated or unreasonable rental rates.

As most of you already know, rental properties are valued by taking the yearly rental income, deducting for vacancy, and adding the rate of capitalization. This simple equation (please contact me for details) will determine whether the property is accurately priced. But if the seller has raised rents to levels that are unreasonable for the area, or is being deceptive about actual rents (not uncommon), you may be dealing with a mirage.

The typical scenario looks like this, investor buys down on the heels duplex for a relatively low price, kicks out tenants, does an OK job fixing the place with new paint and carpet, paints the outside, maybe some new appliances and fixtures. Investor finds new tenants at rental rates on the high end (unreasonable) for the area. He/she owns the property for a year, then based on the increased monthly rentals lists the home for sale at a considerably higher price. Lets call this the "rental flip."


You may be wondering what unreasonable rents are, or, if the seller is actually getting a certain rent, why say that rent is unreasonable? Rents are unreasonable when good, qualified renters, those with solid credit and a strong rental history, won't rent from you. They won't rent from you because they have their act together and know you are overpriced, and are sought after by land lords who know the true value of good tenants. "Bad tenants," or those with spotty credit, work and rental histories will be forced to live in two types of rentals, dumps or nicer rentals with inflated and unreasonable prices. Landlords who rent their nicer units to "bad tenants" take this route believing the higher rents will make up for the increased risk. This is a losing strategy from day one, as tenants with bad credit and/or rental history don't really have anything else to lose by walking out on unpaid rent, or from a trashed apartment.

So what should the novice investor watch for? First, rental properties which have been owned for a short time. While none of these rules are universal, this is a clear signal to put up your guard and look closely at the offering. I always ask for copies of the last three years leases so I can see when the last rental increase occurred. This brings us to our next point, knowing the rental market.

The only way to make a good purchase decision is by personally understanding the rental market. I'm hammering this point, but nothing will ruin your land lording future as much as overestimating your rental stream and overpaying for your investment. If you don't have a deep understanding of rents in our valley, go to a rental agency and tell them to show you some apartments, or tour apartments for rent on your own.

Lastly, let me emphasize, when your dealing with fellow investors the waters get deep and swift. More than any other time in life, NOW is not the time to play "trust me." Never take the stated rents as fact, make the seller provide written leases. In the end, if your seller hasn't kept accurate records or makes another lame excuse, that's a bad sign and you should WALK.

This is a great way to invest your money if you do it the right way and protect yourself.

Best,

Matt