Top 3 things Landlords don’t want to talk about.
By Al Williamson, Leading Landlord
It’s taboo to discuss these “truths” but here goes…
Are you planning to buy rental properties, make tons of money, then quit your job?
Before you do that… let me share some things with you.
I bought my first rental in 1996 and have been addicted to landlording ever since.
My rentals have paid off my student loans, helped me replace my civil engineering salary, and funded my retirement savings. I’m extremely grateful. I really am…
However, in all fairness, you need to know some unflattering things about rentals.
Things Seasoned Landlords Don’t like to talk about….
I am struggling to write this. Mostly because I have to admit that I, myself, was duped.
Things aren’t completely as they seem.
But looking back over 20 years, the highs and the lows, the windfalls and losses, I offer you these insights.
These are the words I wished someone would have shared with me early on in my landlording career:
1 – The number of units doesn’t matter – net income does
It never fails. At every networking event someone asks me, “How many rentals do you own?”
This question makes me cringe! Can you feel my anxiety rising?
It’s a way of gauging my experience and qualifying me for future business opportunities. I get it — no harm– no foul.
But the question is so misguided. The number of rentals you own has nothing to do with how profitable you are.
It’s possible to own 100 rentals and still end up with a $0 net income for the year. Most of the time, if you keep your rentals in good working order, you will barely break even before taxes… and that’s the norm.
Simply put, traditional rentals do not help you increase your annual cash flow. But they do help you grow your equity/wealth.
2 – Striving for passivity only postpones your payoff
Ahhh… the glamour of passive income… it’s so shiny, so beautiful.
passive real estate income
It sells sell late night TV commercials and moves the economy along. We are all captivated by its charm.
Yes, a hands-free lifestyle is attainable, but it’s something that starts to occur towards the middle of your investing career.
You can hire everything out, and turn things over to a property manager, but that will dramatically cut into your bottom line.
Going passive is a solid plan if you just want to park and preserve money. However, if you’re trying to grow your cash flow, then 100% passivity is not the way to go.
Trying to be passive from the beginning only postpones the day when your net rental income exceeds your personal expenses.
3 – Market Rents + Big Mortgages = Cycle of Decline
Real estate cycle
If you want to buy a rental, you’ll naturally make that decision based on current market rents. However, if you buy a house and put 20% down, then you’ve nicely set yourself up to own something that will only produce just enough income to maintain itself.
Your rental won’t be able to support itself AND give you spending money.
Because of this, there will be a showdown between you and your rentals’ reserve fund.
What will you do? Will you save for a rainy day or will you spend the cash to improve your lifestyle? Typically, the reserve fund loses and “unexpected” maintenance tasks get postponed.
Then good tenants leave and “good-enough” tenants move in. And pay even less.
“Good-enough” tenants don’t care if things aren’t perfect… and they expect you to give them grace if their payments aren’t on time.
And so the cycle of decline begins…
But There’s Another Path …
Market rents are the common thread in all of these scenarios.
But you don’t have to accept it. And that’s your opportunity.
You don’t have to limit yourself to long-term status quo market rents!
You can re-position your rental and aim for a more profitable market. You’re the owner; you get to decide.
That’s the opportunity before you. No matter what you own, you can choose to serve a more profitable group of clients. And we are going to help you do just that.
So, keep an eye out for this upcoming series. It will help you tap into more of your potential.
Honestly, how are your rentals working for you?
Let me know if you disagree with the above. Did I mischaracterize the situation?
Also tell me if you’ve ever re-positioned a rental so that more flows in that goes out. I’d love to hear about it.
Leave a comment below.
