My friend just fell into some money and wants a fun way to invest it. His tenative plan is to buy a ten-to-twenty unit apartment building and pay the mortgage with collected rent checks each month, eventually selling the building for (hopefully) more than he paid. He says he’s done a bunch of research but there will inevitably be a list of unforseen problems he’ll run into along the way. I’m hoping that the teeming millions will help shorten that list. He’s got three cities in mind right now: Portland OR, Springfield MA, and Providence RI. Any great wisdom you can offer to an up-and-coming landlord?
I never thought of owning a building as “FUN”. I’m sure more people can help out here, but there are SO many things that make it a misery…
~ people not paying rent on time or at all
~ people being ‘dirty’, causing rodent or insect infestation
~ people destroying the apartment
~ people skipping out on the lease
~ people not reporting major problems (frozen pipes) because they don’t want you in their place
~ major repairs that the rent cheques don’t cover (like a roof)
~ needing/never getting permission to show the apartment to a new lessee or buyer
A friend of mine had bought a building here in Montreal. She couldn’t get rid of it fast enough. It was such a nightmare EVEN TO SELL that she hired someone to do it for her by proxy.
I used to think it was a good idea, but after I saw what she went through, I changed my mind. Keep in mind though that the rental laws in Quebec are VERY heavily slanted towards the lessee.
I can think of a lot of fun ways to invest money buy managing rentals isn’t one of them.
Does your friend plan to move to the city where his rental is located?
Unless he has prior managment experience, I would recommend professional property management.
Something else to consider if he is going to depend on rental income to pay the mortgage, is to have enough set aside for the always necessary repairs and updates as well as vacancies.
Tell your friend that if those schemes for becoming a millionaire that you see on late-night TV were as good as they make them look, you wouldn’t be seeing them on late-night TV.
Buy to rent is pretty normal, but it’s not fun. Your friend needs to look at it like a businessman.
What are the costs of making the property rentable? What are the costs of running the property? Insurance, taxes, etc. What is the likely occupation rate? Don’t count on 100%.
What’s he going to do about people who don’t pay? What laws are in place to protect them? What about damage to the property? Is he going to do everything himself or is he going to employ an agent? How much will the agent charge?
A decent property in a decent area with decent tenants can be a real pleasure and a nice little earner. It’s the last which is the difficult bit.
I recommend that he read the threads there for a while before he gets his feet wet. While profitable (if all goes well), rental ownership is not necessarily fun.
My mother is a professional landlord, and she’s had all of the problems listed above, plus a few more.
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[li]Her previous tenants took it upon themselves to completely redecorate the house, then refused to put it right when they moved out. My mother now has to pay to have it repainted, recarpeted, etc. Even though she’s taking them to court and will likely win, she’ll probably never see a dime of that judgment. The tenants, after all, have principles. Normally, Mom wouldn’t care, but the house was atrocious. The people she asked to look at it were horrified at the bad taste these people had. Keep in mind that dwellings are rented on the basis of appearance. An ugly house is an unrentable house.[/li]
[li]She’s also run into less-than-scrupulous sellers. She’s bought property from people who had no intention of giving it up, making her life miserable in the process. Usually, she has had to go to court to have the contract invalidated (for fraud). [/li]
She also ran into one gent who sued to get his buildings back once Mom turned them around and started making money. Seems the managers were still loyal to this guy and were feeding him all this information. Said managers also helped themselves to thousands in receipts and took off. Said managers also shot their mouths off, leading to their arrest. My mother was able to get restitution for maybe a third of what she lost. The moral of that story is, if your friend buys a building with an existing live-in manager, replace them with someone you know you can trust.
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Landlording is fraught with peril. E-mail me, and I’ll be happy to share more horror stories.
Presuming you go through with this, make arrangements with maintenance people ahead of time. If possible, try to find a one source contractor. In the past, I’ve handled everything from cleanouts and painting to appliance and HVAC repair. By forming a relationship with a contractor, it is hopeful that they will keep their eyes open for problems that are small, and also ways for you to cut your maintenance expenses.
You don’t want to try to find a heating contractor on a Sunday night when tenants are griping that it’s only 50 degrees.
