Over the course of the past seven years, I’ve been building a rental real estate portfolio with the main goal of creating enough passive monthly income that my husband and I never need to work again. Now we are both retired in our early 30s! I am writing a series about the timeline of that process, starting here. Follow my Instagram to see what we are up to now!
Being a landlord is something a lot of people consider when they become interested in retiring. It seems pretty straightforward: you buy a house, find someone to live in it, and then you’re diving into your coin horde like Scrooge McDuck.
Not so fast, slick.
Being a landlord can absolutely be easy and profitable, and there are a million ways to go about it based on your real estate market, initial investment amount, comfort level, etc.
There are also a million ways to fuck it up.
Lemme help you with that. Over the past few years I’ve learned a few things. Sometimes by stumbling on a good solution (by accident or by using my noggin) or sometimes by making not so awesome choices but eventually correcting course.
1. Being a landlord sucks.
When I decided to rent out our first home, I thought, “Piece of cake! We’ll find a renter online, sign a lease to protect ourselves (also found online), then watch the money roll in. Ha! Hahahaha! I mean, I guess it’s that simple sometimes (and I actually have some really awesome tenants in the one property I still manage), but I was surprised at how many people are absolute garbage. It never occurred to me that normal everyday people would treat someone else’s property so horribly. Leaving pretty much every blind in the house broken, forcing tilt-out windows closed so the frame cracked, letting every bulb in the house burn out (Did they go to bed at sunset? Use lanterns? Night vision goggles?). We rented to three separate tenants on our own over the course of a few years, and while one was worse than the others, they all treated the rental property horribly. My beautiful first house had hardwood floors, granite countertops, and giant windows with plantation blinds, but these tenants with great credit and great references didn’t have the same emotional attachment I had at all. I was left making tons of expensive repairs to this higher end home. Yes, they paid a deposit, and in most cases it covered the repairs, but I still had to complete the repairs before I could rent the house again. That lag time was extra money out of my pocket. I eventually wised up and hired a property manager. They take a percentage of the rent each month (mine takes 8%) and I am blissfully unaware of pretty much everything that goes on with a rental once I hand it over to them. That keeps Doormat Ashley from interacting personally with the tenants. (“Oh, you can’t pay rent this month? Okay!”)
2. If your rent is only slightly higher than your mortgage payment, you won’t make any money each month, doofus.
The first house I rented out had a mortgage because it was our first home and we bought it with one (duh). The rent I was getting on that property covered the mortgage and gave me a few hundred dollars extra each month, but by the time I paid for repairs or had a month or two of vacancy between tenants, I was basically breaking even. It worked well for me because someone else was paying the mortgage on my house while I waited out the recession, but it wasn’t really contributing to my monthly cash flow. Long term investments are great, but if your goal is to retire now they don’t help an awful lot. I switched to saving and buying cheaper rentals with cash for awhile, and eventually came back to borrowing money to buy properties, but only in situations when a large proportion of the rent I receive makes it into my pocket, not the bank’s.
3. If at all possible, do any repairs when you buy the house rather than continually playing catch-up.
I’ve found this to be a good strategy for a few reasons. First, when I do the repairs before I get the house rented the house is nicer and usually prettier, so it rents quickly and at a higher rent. Second, you can’t count on a tenant telling you the shabby roof or plumbing has finally started to leak (remember, people are garbage). That little dribble can easily turn into a ceiling collapse if not addressed quickly. Finally, you have an accurate picture of what the house is really costing you if you do all your major repairs first. It really sucks to start looking for a new rental with your savings but have your plans delayed because of an exploding roof or something. (Note: has not happened to me yet.)
4. Buy lower end rentals
I’m sure “lower end” is defined completely differently depending on where the rental is, but generally the rent for these homes is going to be under $1000 per month. Now, the interesting thing I found in the areas around our home in Charlotte, NC is that a house in Gastonia that I purchased and repaired for about $20k rents for $500 per month. That’s pretty typical. That original rental I had? We bought that house for $190k and at its most it rented for $1300 per month. I’m no math wizard (that sounds terrifying, actually), but from a monthly cash flow standpoint there is no comparison. Once you factor in the mortgage payment on the more expensive house it actually looks pretty silly as an income source. I’m all for diversification of investments, but building passive income is dependent on monthly cash flow. It’s all well and good that your house might be worth forty million dollars in twenty years, but it’s not making you any money right now. Cheaper houses in areas with strong rental markets work nicely for someone who doesn’t have millions to invest. Also, they rent quickly and generally have cheaper repairs. The repairs tend to be cheaper because the houses are smaller and a tenant who is paying $500 a month has different standards from one paying $2000. As long as the rental is clean and in good repair it will rent well and stay rented.
5. Don’t be (too) emotional about the houses you buy
When I first started buying rental houses, I treated them as though I would live there. I lovingly chose light fixtures and the perfect shade of light french gray paint. I agonized over which faucet to put in the bathroom. I spent way more money and time than I ought to have because I was emotionally invested in it. What I didn’t realize is that nobody cares if the rental house has your favorite paint color, Ashley. Calm the fuck down. Hiring a property manager cured me of this nonsense. This particular property manager has its own contractor who is familiar with the expectations of a rental. They usually don’t even ask me what vinyl flooring or windows I want to install because it doesn’t matter. As long as they are of good quality who cares? Unless they are paying enough rent that an expectation of luxury comes along with it, tenants look at a rental completely differently from a prospective home buyer. Paying extra for little details that no one cares about was a stupid way to spend money I could be saving for another rental.
I really believe that investing in small, inexpensive rentals is the best strategy for quickly building passive income from real estate. The investment is smaller and the return is higher. A lot of good decisions and even better luck streamlined our path to young retirement, but from the time we rented out the first house to when my husband quit his job was only seven years! While I’m here typing away on a multi-week trip to Europe with my family, those little rentals are making us money, no work required.