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The First Year of Owning a Rental Property

It’s been one year since our first residential rental property opened for business. I say that because it’s very important to treat investment property like a business.  After being landlords for a year, I though I would share my thoughts on the whole process of rental property ownership.

 Property Management

We chose to use a property management company, and up to this point, they have done a wonderful job. The particular company we use has an agreement in each lease to go in every quarter for seasonal updates to the property. While, this is true, it’s actually a great way to make sure the tenants aren’t running a meth lab in our house. We also get a report after each inspection with repairs that need to be done right away or in the future.

Our tenants were late with the rent only one time. They paid about a week late, along with the $50 late fee.  I’m honestly very glad I haven’t had to go chasing anyone for late rent because I’d probably be a sucker for a sob story. For now, we will keep property management so that we don’t have to worry about things like this.

 Unexpected Costs

I’d say we were pretty lucky this year. There were a few minor repairs and a leak under the sink, but those were easy fixes.

In Colorado, the landlord does not have to cover any of the utilities, so our rental lease states that all of those are tenant responsibilities.  The water and sanitation departments used to one department and would let tenants put the bill in their names. This is how our tenants were billed in the beginning.

Then, those departments had a falling out and decided to separate. Now the sewer bill comes separately, but they won’t allow anyone’s name on the bill except the property owner. They will send a separate statement to the tenant, but we are still on the hook if it isn’t paid.

We were bummed at first because we assumed this meant an extra $30 per month out of our pocket. The tenants had no reason to pay up because the bill was in our names, but amazingly, they did. We had a couple of months when we had to pay while everyone was getting used to the new arrangement, but since then, they haven’t missed a payment. I do call every month to make sure, but knock on wood, it’s working out pretty well for the moment.

Maintenance Costs

We know that when our current tenants move out, we will need to replace some windows. The current ones are functional, but old and not very efficient. We decided to replace a few with every turnover of renters, so that’s an expense we know is coming.

 Emergency Funds are So Important When You Have Rentals

You also never know when an appliance might die or a major repair might pop up. That’s why we are keeping a pretty hefty emergency fund. Right now, any rental emergencies would come out of our general savings.

Our goal is to keep saving our cash flow every month until the rental account has $10,000. Then we will shift some money from our general emergency fund into better income producing investments.

 How Much Did We Make?

As of October 1,our rental property has brought in $6776 for 2013, and our expenses including mortgage, insurance, taxes, property management, the sewer bill for a few months, and repairs was $3840.81. That makes our net gain for this year $2935.19.

However, last year was a different story. Our renters moved in at the end of October, so we only had two and a half months of rent in 2012. Because we had to invest some money to get the property ready to rent, our numbers at the end of 2012 were -$5683.15, which doesn’t include the down payment and closing costs. When you look at the full 12 months from October 2012 to October 2013, we are in the negative by -$2747.96.

 Is It Worth It?

Considering that we have done pretty much nothing since getting the property renovated, I think this is an easy $245 per month. We owe about $46,000 at 4.25% on the balance of the mortgage, so this is something we could conceivably pay off to increase our monthly cash flow. We haven’t decided if this is the best use of our liquid funds.

Yes, it did take some money to get started, but the way I see it, someone else is paying off this house and whatever repairs it will need in the future. We can sell it someday for a profit or keep it as an income source for retirement. This one property isn’t going to pay our bills, but it adds to other streams of income that we are in the process of developing.

Our tenants just renewed their lease, so hopefully next year will go as smoothly as possible. I’ll let you know either way.

Would you love to be a landlord or is it smarter to invest in the stock market?

I’m guest posting today at Moneystepper about the pros and cons of blog giveaways. Check it out!

 

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

52 comments

  1. I think if I was going to do this I would have to go through a management company also. Not only would it help to add a layer of protection between me and the tenants, but I’m sure it would also help you out later if you decide to scale your ambitions upward and have 3, 5, or even 10 rental homes in the future.

    +$2K is not bad for profit off of this venture! Good work. Plus people should keep in mind that as you use your rent payments to pay off the mortgage, you technically are building equity in the asset by paying off the house. So really other than taxes, insurance, and repairs, everything is going back into your pocket in one shape or form.

    • Absolutely. This property is not really for living expenses at the moment. Someone else is basically buying me a house that I can sell or use to pay monthly expenses down the line.

  2. We love being landlords AND investing in the stock market =) Having a side income stream that is less related to the bumps of the market feels pretty good now, and I think will feel even better when we get to the point where we’re living off of our investments.

  3. I think being a landlord and owning rental property is preferable to investing in the stock market, at least for those who are not nearing retirement. I want to own rental properties because it’s a nice way to diversify your income; people will always need places to live. Assuming I do end up owning rental properties, I could see myself getting out of them and putting the money in the stock market or other investments that require less time, energy, and attention when I’m nearing retirement. There definitely is always little things to do with the rental unit at our house and as soon as they move out I’m sure we will have a list of things we want to tackle before the next one moves in.

    • I am not sure if we will keep properties or sell some off as time goes on. I guess it depends on the market. I still do invest in the stock market, but a rental takes a pretty good chunk of income to get started.

  4. I love the fact that you’re using a property management company. That’s the way I’d want to go. I’d probably be a sucker for a sob story too or at least feel a little guilty. It’s awesome to hear that you made a profit this year while using the property management company. I think rentals are a great investment.

  5. Congrats at being at it for a year Kim, and for doing so well at it! If we had the time, then we’d be doing both real estate and the market because I think they can bring a fuller diversity to your investing. I love that you’re building a healthy EF for it and will be shifting some of it to more income producing investments from there – the best of both worlds in my opinion. 🙂

  6. I’m glad to hear that things went fairly smoothly with your rental. That’s great that your tenants have signed on for another year! At the end of next year, you’ll be in the black for your carrying costs and have paid down some of the mortgage 🙂

  7. I never thought about amping up the emergency fund for a rental property but that’s a great point. You never know when a major appliance might cop out on you.

    • I learned my lesson about not having funds to cover just about anything that could happen. Otherwise, we’d have to rely on credit, a road I will not go down again.

  8. Great to see that the rental is working out for you. I’m hoping to buy a duplex as my first home and have a rental. But the idea of being a landlord to your next door neighbor is intimidating. Perhaps you can hire property management company if you live in the property? Glad to see that it has produced passive income for you!

    • I’m sure you can hire property management for anything, but if you lived there, they are still going to come to you with problems. Maybe have a good handyman to call if you need help. You can also hire people to find tenants for you if you don’t want to do all the screening.

  9. We would love to get into the real estate rental market, Kim. Although I know there can be problems, I also see that it can be lucrative as well. This is definitely on our list of investment options for one day.

    • I think rentals are great as long as you plan for anything that can happen. If you go into it like a Pollyanna, I think you’d get burned.

  10. Sounds like you’ve done pretty good!
    We’ve been landlords for eight years. We’ve had years of almost no expenses and others that were awful. It just depends. Overall, I think it has been and will continue to be a good investment.

    • Did you buy rentals when you were in high school? Eight years is awesome. You’ll have those suckers paid off long before you retire.

  11. Sounds like easy money! So long as the tenants are cool, you will be cool.

    Any idea how much the property has appreciated since last year?

    • I believe it would be at least 15%. We got this house for a really good price. I feel bad when people get sick and their kids have to deal with their estate, but it honestly worked out great for us as the seller wanted to be rid of it.

  12. Glad to hear you’ve had such a positive experience? Real estate is something I’m interested in getting into at some point, but I’m not in a big rush. For every positive story like this I also hear negative stories, so I certainly don’t think it’s a sure thing. But if you can do it right it’s a great way to diversify and get some extra cash flow.

    • I have talked to lots of people who have real estate and it seems the ones who are truly successful at it either have the skills to fix things or the ability to hire it out and are very selective on picking tenants. The ones who fail seem to want to do things as cheaply as possible and attract tenants who are not top caliber. You also have to be right on top of anything so that it doesn’t escalate out of control. If you can’t do it yourself, hire it out. The other thing I think people do wrong is not have enough cash to cover emergencies and times when you don’t have a renter.

  13. Right now it’s other kinds of investments, but who knows later on down the line. If so, it wouldn’t be something I’d invest in in LA unless I struck it really rich. I guess I kind of am sort of a landlord in that I rent my garage for $150/month, and I’m still kicking myself for not doing it sooner, but it’s also taking a huge risk since my real landlord doesn’t know. But I love the passive income!

    • Have you seen that show called World’s Worst Tenants? There is one where these people have an illegal sweatshop in the garage! On second though, don’t ever watch that show.

  14. Very cool, thanks for the recap. Rental property has a spotty reputation so it’s nice to see a well-laid-out review!

  15. A $10,000 emergency fund for the rental property is our goal as well. That amount covers pretty much anything that might arise. I think the first step in a good financial plan would be to invest in the stock market first. Rental investments should come later once a solid financial foundation has been established. This will bring some decent diversification.

    It’s good you are self-aware enough to know that you would be a sucker for a sob-story. If anyone would feel uncomfortable chasing down that late rent or dealing with a trouble tenant then a property management company is the way to go.

    • I am certainly hardening with time, good or bad, that’s how it goes I guess. I had to kick a 16 year old out of my office today for being disrespectful. It gets harder to smile and make nice with people who are complete jerks.

  16. For me, having both is a good mix.

    I became an accidental landlord, but very glad I did. Its one of my most enjoyable and rewarding investments.

    When earning positive cash flow, the appreciation on the property in the long term is also a nice added bonus!

  17. We don’t have any experience ourselves (and probably won’t in the near future), but our friend in NYC does have 2 houses he rents. It does bring him a good income, even if it’s indeed a lot of work.

  18. We have a rental property and it is indeed a lot of work. Its def. not all candy and roses like some people think but it is producing some income so theres that.

    • It certainly isn’t all roses. We got out quarterly report and it said the new stove we just bought last year is really a mess. It almost makes me want to take it personally, but I guess our renters just aren’t the best house keepers.

  19. Thanks for sharing the insight Kim. I have been thinking about this for quite some time. I would have to go with a management company, but just don’t have the liquid funds to jump into the real estate market just yet. Maybe one day it could happen. Glad you guys are in the black this year!

    • It took a while to save up and it’s hard to hold that money when you could invest it in something else, but I think real estate makes a great part of anyone’s long term investment scheme.

  20. Congrats for your first year and I know good years will follow! We had a rental house before but my mom sold it because it’s far away from us and no one managed that property.

  21. I was a landlord for roughly 13 years. I owned 44 units of apartment buildings and a shopping center. It helped me reach financial independence in my late 30’s! I believe in rental property, but like larger units because of economy of scale. Congratulations on the profit and you are on your way to a real estate empire.

    • I don’t believe there is an apartment building that big in our town, but I’d love to branch out into duplexes or four plexes at some point. The only problem here is that multi unit properties tend to attract the kind of tenants we don’t want, so it would have to be a bit nicer than what is available here now for the most part.

  22. Glad the first year turned out well. I would definitely use a property manager too… too much mess otherwise. I also would probably be too strict with money required upfront (I would want first and last months rent plus one month’s deposit) so I don’t know how good I’d be as a landlord! Living in NYC does teach you both ends of the spectrum–how bad a slumlord can be and how terrible a deadbeat tenant can be so I’d want to be prepared for the worst, lol.

    • I would not be able to sleep if I wasn’t fair. Although a bad tenant might make you want to cut some corners. I hope I don’t have to find out.

  23. It looks like you’re on your way to becoming a real estate magnate, Kim! I would use a property management too. My time is already scarce and it would be worth the cost to me. We haven’t ventured outside our own home but it’s something we keep in mind. Real estate is so expensive in LA. Anything cheap isn’t very nice and I’m not ready to pull the trigger on another big loan.

    • Geographical area can certainly make or break a real estate career. It would be nice to be a real estate magnate, but I think I’m a ways from that.

  24. I think renting a property nowadays is a dangerous game. The local council around where I live are terrible in terms of support anyway (helping with problems you have with the home) and above that are forever adding new costs and making it harder and harder for you to pay it off. It is pretty scary.

  25. I think using a property management company is a smart move. They can handle all the details like collecting rent and maintaining the property while you can focus on the bigger picture.

  26. We really really want to buy an investment property. We’ve considering buying something in Maine by my parents so they can act as an unofficial management company. My step-dad is a few years away from retirement and enjoys doing little projects around the house. We also couldn’t afford to buy another property here because prices are so insane.

    • What are the property costs like in Maine? I know nothing is as expensive as NYC, but I assumed all of New England was pretty pricey. I can’t imaging a better property manager than a handy Dad!

  27. I’d love to be a landlord someday, so I love reading about your experiences. It sounds like you have some reasonably reliable tenants who haven’t decided to start a meth lab. Using the property management company sounds like a no brainer for anyone who doesn’t enjoy maintenance work. Thanks for sharing.

  28. Yup! It’s so true. I stop calling them “emergency funds” when it comes to my rental properties because I’m never surprised anymore when they need maintenance or repairs. Even the most well-intentioned tenants will find new and surprising ways to cost me money 🙂

  29. I love how you shared your different encounters and what to expect. It was very informative and helpful! Thanks for sharing!

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