5 Tips to Buying Your First Rental Property

Question: Tips for First Time Landlords

Marsha, my wife and I have saved money and want to purchase some income property. We’d like to start with a duplex or even a triplex. Do you have any tips or advice for first time landlords?

Answer: 5 Tips for First Time Landlords

There are many components and variables to learn and consider.  Be sure to read and study before you make the leap. There is no better teacher, however, then the actual experience.

Here are 5 tips, however, I’ll share about buying your first rental property. Remember owning rental property is a business, not a hobby or recreational pass time.

Tip #1: The Tenant–Client Relationship is One of Business!

Many new landlords struggle with the realization that they must have a business relationship with their tenants and they’re not friends. Tip number 1 establish business policies and don’t deviate. Be consistent and fair with all your tenants.

It is sad but true once a tenant realizes you’ll allow them to slide on the rent it will happen every month, without fail. Tenants will have true, valid and heartfelt reasons why they can’t pay the rent on time. You may allow a late payment once. When it happens again you need to have a serious talk with your tenant. If they can’t afford the rent let them leave and even give them a reference. Don’t let their emergencies in life become your emergencies. Be sympathetic but firm.

Tip #2: The 30% Down Payment Rule

You said you’ve saved money? That’s good.  Rental properties should be purchased with at least 30 percent down. Not only will a lender require a substantial down payment it’s also a good idea from a business aspect. Lenders charge higher interest rates for non-owner occupied purchases. The more money you put into the property the better your cash flow every month.

Tip #3: Calculate All Margins and Expenses-TIMMUR

Speaking of cash flow, before you purchase a property calculate all your margins and expenses. Expenses can be remembered as TIMMUR. That is Taxes (property), Insurance, Management, Maintenance, Utilities and Repairs. Expenses should not be more than 50% of your gross operating income. If your rental market survey shows a potential rent of $3,000 expect to pay $1,500 in expenses. If you manage the property yourself, as many first time landlords do, factor in the cost of paying yourself.

Tip #4: Location, Location, Location!

Find a good location. This includes researching gang and crime statistics in the area, a good school district, employment growth and convenience to parks, restaurants and shopping. I strongly advise against buying a fixer or vintage property. Repairs and maintenance will cost you.

Here is a cautionary tale of first time landlords. A Santa Barbara couple purchased a four-plex in Ventura during the rising market of 2005. They paid $580,000 and bought four 65 year old one bedroom cottages in a questionable neighborhood.   Two big mistakes. It never went well. They lived in Santa Barbara which was too far away from their property for their self-management.

From the first month on they had costly plumbing and electrical issues. The tenants knew the landlords weren’t local. The owners would visit the property and find dead cars in the front yard on cinder blocks. One tenant brought his motorcycle onto the newly refurbished oak floors to work on it.  Another tenant developed a drug problem and painted the inside of her cottage black with enamel paint. The police were on a first name basis with the owners. After years and much money spent in repairs and maintenance they were happy to sell the property, at a loss, for $560,000.  They learned that being an income property owner is a difficult business.

The story has a happy ending though. The couple took their hard won knowledge and purchased income property in Santa Barbara. They are now thriving as landlords.

Tip #5: No Such Thing as Too Much Research

Do your research, purchase your rental property, and let me know how it goes.