Rental properties

As many of you have seen, I often recommend that my students avoid owning rental property. I have also mentioned that I never do a deal on a piece of rental property where I end up holding the property and keeping regular tenants in it. There are several reasons for this.

One of the biggest reasons that I recommend new investors avoid owning rental property is because you MUST make sure that you have PLENTY of available cash. Since you are responsible for maintaining someone else’s home, you have to make sure you can come up with the cash to pay for any repairs that come up during the time that it is being rented. Depending on how much monthly cashflow you are making from the property, you may end up having to pay out more than you will make from the property in a year!

Another reason why owning rental property when starting out might be a bad idea is because very often, new investors forget that they must plan for VACANCIES. Even in “hot” rental areas, a property can sit vacant for weeks, or even months. During this time, you are still on the hook for making your payment. Of course, since you will not have the income coming in from unit, this money must come out of YOUR pocket!

Something else that must be taken into account is that many times, tenants just stop paying their rent! In cases like this, you must be prepared to deal with the non-paying tenant. I cannot count the number of “stories” that I have heard over the years from tenants who have not paid their rent. I have to share one of the more funny excuses I heard.

When I first started investing, I had a tenant who had not paid their rent for December. I assumed she had simply stretched herself too thin with Christmas spending, so I tried giving her a call to find out when she could pay. I left MULTIPLE messages over several days and none were returned. She even started having her kids answer the phone to tell me that she wasn’t there.

Well, I went over to the house finally to confront her. She came to the door and looked shocked that I had actually come out to the house! It was obvious that she had just got out of bed and had forgot to look out the window to see that it was the landlord so she could hide until I left. I asked her about the rent and could see her quickly scrambling to think of a reasonable sounding excuse.

Her excuse (are you ready for this?) was that she had sent the check on time, but it had been returned to her because she forgot to put her return address on the envelope. She then said that after she got the check back in the mail, she resent it out to me the next day.

Did anyone reading that story stop for a second and think, “Uh, how did the post office return it to her if there was no return address?”

There are more reasons why I do not recommend beginners try to buy rental properties, but I won’t go into everything that must be considered. However, I am not saying that owning rental property is always a bad idea. Obviously, there are MANY investors who have made a very good living by only owning rental property. However, this is because they had plenty of money saved to pay for repairs, maintenance, evictions, vacancies, etc. Many times, these investors use very good property managers or companies to take care of the day to day maintenance and issues that come up with rental property.

All that said, my advice has usually been to do as many “no money down” creative real estate deals as possible FIRST. Get some experience dealing with property where you are NOT “on the hook” or do not have as many responsibilities as you would have with rental property. Save up plenty of funds to deal with any problems that may arise with rentals. Rental property can still be picked up creatively without putting money down, but if this is one of the first deals, the property should then be sold to another investor for a quick profit.

This is how you limit your risk and gain more experience before exposing yourself to more risk. I am not against rental property at all. I simply advocate getting an “easier” education FIRST before taking on the responsibilities that rental property involve.

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