5 Things to Know Before Landlording
- Your Property Will Be Damaged: Tenants will not care for your property in the same way you do. That means, there will be damage. Way more than you ever expected. Prepare for it. Have a fund available for major fixes. Put in effort to do preventative maintenance because your tenant won't.
- Have Cash Available: Cash is always king, even in real estate. Don't dump all your cash into a real estate investment because you'll need money to support your investing if things turn down.
- Use Systems to Manage: Creating processes and systems to manage your property must be a priority. If you're not going to self manage, then find a property manager with well built systems and processes in place to drive value for your property. Good property management is about using systems that build property value. If you self manage, look to outsource things like maintenance calls using Latchel.
- Have Patience: Building passive income through landlording takes time. Have patience with it and know that you're building value in the long run. This is not a buy and flip business. It is a buy and hold business.
- Learn How to Finance Investments: Learning the ins and outs of financing can lead to big returns when you're in it for the long game. Understand your loan and financing options so that you make wise decisions on every home purchase. Check out our book summary on the ABCs of Property Management for a cash flow level understanding.
Mortgages: A 15 Year or 30 Year Loan?
Mark Ferguson posts a great article comparing the 30 year loan and 15 year loan's pros and cons. Ultimately, he believes the 30 year loan provides the better deal for most buyers and allows them to retain liquidity for other investments. When taking each into account, your total interest payment will be much higher on a 30 year, but he says that the reduced monthly payments make it worth it over the 30 year period.
He reviews some of the history around the 30 year mortgage as a uniquely American invention:
In fact, the United States is one of the only countries that has a 30-year loan. It was created with support from the government to help people afford houses. Banks would not offer a 30-year loan on their own because they do not make as much money with a 30-year loan even though it has a higher interest rate than a 15-year loan. I don’t think it is smart for most people to get a 15-year loan instead of a 30-year loan. A 30-year loan has lower payments, lower risk, and may be a better financial decision.
A large part of his analysis takes into account the growth rate you could get taking the principal saved on the 30 year mortgage and investing in other investment vehicles. Whether it is housing or stocks, all you need is a 5% year over year return to make more money from the 30 year loan than the 15 year.
If you invest that $456 per month into something that earns just 5% interest, you would have $134,505 at the end of 15 years. That is more money than the interest you saved by getting a 15-year mortgage. If you earned 7% interest, you would have more than $160,000. If you were me, you would invest all that extra money into real estate and make a lot more than 7% interest.
Of course, if you approach a bank or lender, they'll encourage you to go with the 15 year loan. Why? The bank actually makes more money on their bottom line even though the interest payout is lower because they can reinvest it at a higher return than your interest rate. Interesting stuff, right? Check out Mark's full article for the math behind the benefits of a 30 year loan.
Question: We have a tenant who has been incarcerated. Her aunt is coming by to remove her personal belongings from the unit before the tenant’s 30-day notice expires. Does the tenant still owe rent for the remainder of the days left on the notice to vacate even though the unit key has been returned to us?
Answer: Yes, unless you are able to relet the premises before then.
Question: What should I do if I suspect drugs are being sold out of one of our apartments?
Answer: Call the police and report the incident. Ask the police for further direction. Document all of the calls and what you said, did and observed. If you can prove illegal activity, commence an unlawful-detainer action.
Question: If a resident dies and we discover the body, should we call the police first or a family member?
Answer: Call the police and give them the names and addresses of the family members. Wait for further instructions from the police.
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