Changes in the new tax law mean it's a great time to invest in real estate. Between lower effective tax rates for LLCs, potential drops in property prices in coastal markets and fewer tax incentives tied to home ownership, DIY landlords have an extra edge they didn't last year. But, if you're thinking of buying an investment property, it's important to be as diligent about the human side of your business as you are about the financial side. Otherwise, you risk joining the ranks of the world's worst landlords -- and jeopardizing your potential future profits.
First, let me clarify what I mean when I say "bad landlords." I'm talking about the kind of landlord friends warn each other to avoid. This is the person who's in it strictly for financial gain. These folks do the bare minimum to keep their properties habitable, make it difficult for tenants to report problems and count on a steady stream of new renters to keep their properties filled (often because they charge below-market rates). This operational model may offer some financial gains but ignores the fact that real estate is an incredibly human business. Disregarding the relationship side of property investment yields bad financial outcomes in the long term.
So, how can you avoid becoming the type of landlord nobody stays with more than a year? Pay attention to both sides of your business: investment and operational.
Getting the investment right
The new tax law makes the investment side of things more appealing than ever. But, that doesn't mean buying real estate is a smart move for everyone. Before buying a property, consider the following:
Don't over-leverage yourself.
During the housing crisis, there were a rash of renters who, despite paying their rent on time, were evicted because their landlords had stopped making mortgage payments and lost the properties -- without telling them. Now may be a good time to buy, but if you haven't worked out the financial details, hold off until you have. The potential consequences of taking on more than you can afford -- in stress, emotional taxation and debt -- are too great.
Do your due diligence.
Problem-laden properties may be cheap, but they're rarely good investments. Understand what you're buying -- and what you'll have to do once and on an ongoing basis -- to make that building livable for your tenants. Short-term savings too often mean higher long-term costs.
Getting the operations right
In real estate, you can't really separate the financial side from the human side; they're inextricably entwined. And it's the human side that makes real estate a particularly complex type of investment. Being a successful real estate investor means being a good landlord, which requires getting several things right:
Even if you own and rent just a single property, you're a small business. That means you need to get the word out about your property to as many people as possible. The bigger your audience, the more likely you are to find the kind of excellent tenants who make your life better. These days, online rental sites make it easier to reach big audiences. The challenge is filtering what you get.
Screening prospective tenants
This is one of the hardest and most important jobs a landlord has. Finding good renters can help you avoid all kinds of problems down the road. But, remember: Renters are also screening you. If your property isn't well-maintained or you're hard to communicate with, it will be hard to find and keep good renters. That means more work for you in the long term.
Managing maintenance requests
This is the kind of thing you may be able to handle on an ad hoc basis when you have one property but that quickly becomes chaotic as you expand. Do yourself a favor and use a scalable system from the start. In addition to establishing relationships with people who can do any work you can't, have a system for tracking, processing and closing requests.
Having a backup revenue plan
Sometimes, tenants don't pay rent on time. Trust me, your mortgage lender will not care. Making sure you have a way to pay your mortgage even if you miss a few months' rent is an essential part of succeeding in real estate investment. It's also a great way to avoid unnecessary stress.
Every investment vehicle comes with risks. In real estate, a big part of managing those risks is managing relationships: with your tenants, with contractors, and even with your bank. Investing the time and energy (and money) necessary to ensure that those relationships are strong will help boost your odds of financial success in the long term.
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