It was either my third of fourth property. Just before wiring the down payment, I stopped and thought, “Am I really ready to do this? Am I really ready to go further into debt to make a few extra hundred dollars a month?”
The answer—obviously—was yes. Fast forward to owning four properties, which was making me an extra $1,500 per month (on average) after all expenses. If I kept leveraging myself properly (and safely, of course) at that rate, I could eventually acquire four more and become financially independent!
At this point, I wondered, “Who wouldn’t take advantage of other people’s money to earn a profit if given the chance?” Some people think it takes money to make money. But I say it takes other people’s money (aka O.P.M.) to make money. (In my case, the “O.P.” is the bank.)
It’s so easy to get caught up in the “what ifs” when it comes to real estate. It’s a very healthy mindset to have. There are a lot of considerations. But if you find yourself failing to act and stuck in a vicious cycle of thinking about this and that and crunching numbers, here are 5 ways to hack your way out of analysis paralysis.
1. Set Goals and Move Toward Attaining Them
There’s a reason why you’re doing this, right? Is it financial independence? Is it retiring early? Is one of your properties intended to pay for your kids’ college?
Property rentals, flips, wholesales, and so on are great vehicles that can help you reach these goals—if used correctly.
My goal was early retirement. Today it was 60 degrees with blue skies! My wife and I enjoyed a quick lunch and a couple drinks out, followed by a nice walk and a bit of playing fetch with our dog. We talked about how much we’re enjoying retirement.
Rental properties gave us this freedom. Keeping your priorities in mind will help ease all those scary thoughts you have about jumping in.
2. Plan for Worst Case Scenarios
Can you handle a worst case situation? What if someone trashes your property or needs to be evicted?
These horror stories happen. I’ve had tenants damage my property above and beyond their security deposit. Other tenants have skipped out in the middle of the night. I’ve even had tenants refuse to pay rent after requested repairs failed to be made. (To be sure, every single one of these tenants were placed by a terrible property manager, who I no longer employ.)
These experiences exposed me early on to the headaches that can come with real estate. But insurance is there for you! And sometimes, yes, you’ll lose money because people are crummy. Most times, though, people want to avoid any legal recourse, such as evictions or small claims court. If you can work out a deal (cash for keys, payment plans, whatever), most of the time you can avoid court.
The question is, can you handle it? If your property cash flowed $5,000 per year and you had to spend that cash flow on an eviction, could you handle that?
The idea here is to mitigate risks. If that cash flow was suddenly spent on an eviction, can you take on the mortgages and other expenses? If all the appliances break at the same time, or if a storm comes through the area and decimates the house, can you handle it? Of course, for many of these scenarios, that’s exactly what insurance is for. But there is no doubt these things can happen.
That’s why I plan for the worst by adding a few thousand dollars into my anticipated expenses each year. If I don’t use it, great! It’s an end-of-year bonus for me.
And honestly, it’s also why I’ve bought more than a few houses. This leads me to my next point…
3. Diversify, Diversify, Diversify
If one rental has trouble, I have the cash flow to float it and to help support the needs of the others. Diversification makes this possible. I diversify both within real estate and outside of it. I have invested in three states and thus three different economies, climate zones, and real estate markets.
If my Southern properties get hit with a hurricane, I have my local properties and properties in other states to help make up for the profit loss. If a huge snow storm hits my Northern properties (like January’s “polar vortex,” when I got a $900 bill for eight days of snow removal for two properties), I can deal.
However, calculating conservative cash flow estimates also helps me endure these situations. I don’t ever have to feel I need to go without, because again, I pad my estimates conservatively.
4. Prepare for Floods, Fires, and Tenant Issues (Oh My!)
I own a condo in a building where other residents started a fire. When it happened, I had only owned the property six months. At that point, I was still newer to the role of a landlord.
A fire occurring in the building I owned property in was always a low-key worry of mine—the possibility is part of the nature of owning a condo. I just never thought it would happen to me so soon.
It turned out that I was immensely lucky for many reasons: No one was hurt. The fire was on the other side of the building. After testing, the condo I owned was still habitable (they didn’t even need to sleep elsewhere that night). None of my tenants experienced any property loss
I require tenants to have their own rental insurance to cover any personal property losses, and the landlord insurance would have otherwise helped cover expenses related to rehabbing, rental income, and alternative accommodations. But if things had gone differently, it would’ve been a major headache and undoubtedly resulted in initial out-of-pocket expenses.
In another condo, my tenants once called in the middle of the night, saying they had a ceiling leak. (Knock on wood, this is the only middle-of-the-night call I’ve ever received from any of my tenants who I’ve managed personally.) The leak was so bad, the fire department ended up having to turn the water off to the entire building. I offered to cover a hotel stay for the tenants. Piping was determined to be the issue—something that’s covered by the H.O.A.—so I wasn’t responsible for paying for the fix. After asking nicely, I was reimbursed for the tenants’ hotel stay, as well.
I’ve also had tenants who were getting divorced or going through ugly break-ups; tenants who were deploying for the military and therefore needed to break their lease early; and even tenants who had such bad experiences with our property manager (yep, the same one I mentioned earlier) that they looked up my information and called me about it.
At the beginning of all this, I would have deemed any one of these emergencies. But now, it’s just part of the business. Things can be handled. Open communication and a can-do attitude do wonders for the whole experience.
For those getting divorced, figure out who is staying (if anyone). If no one is staying, create a lease-breaking document, charge them the appropriate penalties, and re-rent the property. It’s all doable.
Adopting this mindset is a product of years of experience.
5. Calculate Your Hourly Wages
Ask yourself, “Is your monthly real estate paycheck and time you’re dedicating to real estate worth it?” If you make $300 a month from one property and spend three hours a month on it, that’s $100 an hour. Not bad at all!
Some properties I hear from tenants twice a year, and one of those is me simply checking in.
The highest hourly wage this past year for one of my properties was over $5,000 per hour. Of course, that’s because I’ve only had one maintenance call, and they renewed their lease. But if I had spent an hour a week on this property (which would be a rarity for most properties), I would still average over $100 an hour.
The lowest hourly wage was for a property I acquired this year. It’s earned me an estimated $202 an hour so far, due to some issues between the management company and the tenants. In this instance, I ended up having to get involved directly with the tenants, apologizing to them for their experience and essentially resolving the issue to their liking. It wasn’t too hard to do, though—the tenants simply didn’t feel listened to. Once I put in the time to ask what they needed, empathized with their situation, and fulfilled their needs, it was resolved and all was well.
As previously mentioned, in the beginning of all this, maintenance calls and whatnot were highly stressful for me for whatever reason. Now, with each call, each turnover, etc., I’ve refined my processes, learned to vet tenants appropriately, and managed to serve my tenants very well—without any of the personal stress I previously experienced.
There will be growing pains, to be sure. But if you’re anything like me (generally a type A personality), you’ll become more relaxed with more experience. You’ll also feel more at ease as you assemble the proper team if you self-manage or hire a quality property manager. It really does wonders for your peace of mind (and bottom line!).
If you need help, give us a call at 202-909-1201 or email us at firstname.lastname@example.org to find out more.
(Adopted from BiggerPockets.com)