Landlording: The First Tenants

It’s been 9 months since my very first rental property was leased.

We ended up $6,000 in the hole, animal control was called,  they’ve already attempted to break their lease…twice, we’ve had the home tested for mold, and as of this post… I gave them the notice that I intend to end their lease.

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…that means it’s officially time for my first Landlord Update!


 

When we last spoke about the rental house, my husband and I had recently moved out of our home of 5 years and were in the midst of finding a tenant. I had shown the home to 30 families, screened multiple tenants, accepted 3 applications, rejected 3 applications…and still had zero tenants. Frustrated was an understatement.

In my personal life, I had recently accepted my current job, but everything regarding working was on hold because we were days away from our planned trip to visit my family in Malaysia, so I wasn’t able to earn an income. Yet, both mortgage payments were due, both sets of utilities, and our savings account was almost empty.

Rather than waste an entire month where I couldn’t show the home (and guarantee financial ruin when I returned) , I passed the door keys over to a property manager and boarded my flight to the mother-land. Family is more important than money, and I didn’t want any detractors from spending time with my relatives.

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Around the 10th day of our trip, I was sitting in the back seat of my uncle’s car on the way to dinner when I got an email from my property manager stating that they found a tenant who would be moving in five days later. We breathed a huge sigh of financial relief, and officially declared ourselves actual landlords and not just two dudes with a “for rent” sign in the yard.

That is where this story begins…

 

Disclosure. This is a public blog and even though I pride myself in transparency, it’s poor business sense to show my “bottom line” to strangers who may/may not be a tenant of mine…so I will be writing this post with that in mind.


 

Budgets Are Sexy.

Every time anybody talks to me about their passion to own rental properties, I ask them the same question: “Do you have money?”

I’m not referring to money needed for the glamorous things such as renovating, advertising, or even purchasing the property to begin with. Instead, I am referring to your ability to front the unlimited cost of unforeseen expenses up front with virtually no warning.

Throughout my debt free journey and excluding those who participate in their own capacity, I routinely bump into two different kinds of people:

  • Over-workers: Those who believes you can pull yourself up by your bootstraps (in this economy? I digress) and will rank up to that corner office and management role with enough hard work, tenure, and student loan debt under your belt. Nothing else matters.
  • Over-Investors: Those who believe that the overworkers have it all wrong, and the only way you can get rich in this world is by taking risks and investing money (including but not limited to get-rich-quick schemes, multi-level marketing, foreign currency, and lately… life insurance scamming). Nothing else matters
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    Me.
  • .

Naturally, my interest in rental properties places me in similar circles as the Over-Investors, but our conversation usually ends when I bring up the budget. It’s all fun and games to imagine the piles of cash you’ll theoretically rack in, but nobody ever thinks about the foundation required. If you want to succeed, you’ve got to plan exit strategies to combat every potential opportunity to fail. Landlording is a business, and I’ve got to operate it as such–that includes running a “profit and loss” spreadsheet.

For starters, before I ever put a sign in the front yard, I ran the numbers on my rental house:

  1. Income:Rent that I determined I was able to ask/receive for the property.
  2. Expenses:My mortgage payment.
    1. Property Management: Even though I planned to self-manage, I priced in property management. Why? Because this was brand new to me. If I wasn’t cut out to do the management, or I underestimated the responsibility, I could just hand the house over to a pro without taking a loss…which, I eventually did.
    2. Reoccurring expenses: Insurance, fire protection, trash pickup, maintenance, etc.
    3. Unforeseen expenses: Basically…repairs.
    4. Vacancy: I budgeted 2 months of vacancy. Meaning, I’d have 2 months of all of my expenses in my savings account to cover those moments when the house was totally empty.

In case you missed the story right here on this blog, I paid off $50,000 of debt in 18 months and I accomplished this by carefully monitoring what I spent, saved, and allocated to expenses. This approach gave me the financial success that made being a landlord possible, so naturally, I am going to incorporate many of the same principles into my rental kingdom.

I also kept a rainy day fund intact to cover financial emergencies in my life, and boy, am I glad that I did.

 

Buying Their Silence

The first three months were pretty routine. They paid on time, requested a repair on the hot water heater, and noted a roof leak that had formed. I was a little surprised by the leak because I thought we had it fixed before we even moved out of that house, but we covered the costs and moved on. For these months, we didn’t truly turn a profit due to the repairs, but we did make enough to cover our expenses on the house…until the HVAC.

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Literally my 30+ year old HVAC the minute it heard I got paid for the first time in 4 months.

For clarity, my husband and I lived in this house for 5 years. It was our first home purchase, the home we got married in, the home we got 50k into debt in, and the home became debt free in. We know this house inside and out, better than the house we live in right now.

 

When we had our semi annual HVAC inspection the week after Thanksgiving, they reported back that our unit was malfunctioning and was too old to order the parts for as they were out of production. I can’t say I was surprised…just bummed that it happened right when I was about to get my first paycheck since July. After some shopping around, we ultimately decided to replace the entire unit to the tune of $4,400…cash.

When you’ve got a tenant in your home, you don’t get to “save up” or put off repairs until you can afford it. Not only is that horrible business and neglectful towards your investment (the house), but depending on the repair–it’s illegal. As a landlord, you are required to provide a safe and habitable dwelling that is equal to what you originally leased to them. Basically, I couldn’t say “turn off the heat and just use blankets“… I had to make right on the repair.

I alerted the tenants that we were going to be replacing the HVAC, and coordinated the vendor’s schedule with theirs. My tenants were sick with the flu and postponed the repair by 11 days, but we eventually wrote the check, replaced the unit, mailed them a holiday card with a small gift, and moved on with our lives just in time for the new year.

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My tenant.

Then, one Sunday morning, I got an email from my property manager declaring that the tenants were requesting a “credit” on their utility bills. They found that their December bill was high and asked us to remedy the situation.

Yes. I had just spent $4,400 cash a week before Christmas and three weeks before my first paycheck that I had earned in 4 months to replace an HVAC…and they had the audacity to ask me to give them additional money.

I thought about giving them the credit because I wanted to maintain a good landlord/tenant relationship, but ultimately my rental house is a business, not an emotional investment. Thus, after I cooled off–I informed them that the utilities are their responsibility (according to the lease) and I would not be crediting them for it. However, they now had a brand spanking new HVAC that would be exponentially more efficient and money saving going forward. I smiled at my business savvy and continued on with my week.

Unbeknownst to me, they were making threats to my property manager.

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The NERVE, am I rite?

My peaceful, on-time paying tenants had balked at my response and immediately demanded a utility credit, their security deposit refunded, or they’d break their lease and move. The word “attorneys” and “lawyers” were spouted off, and then they went totally silent. Between you and I, the thought crossed my mind that they just took off in the night abandoning my house. But, the following month, their rent check came in on time. We were still in the landlording game.

A few weeks later, a former neighbor reached out stating that my tenants had called the police on them to lodge a complaint. The war had officially begun and I completely missed the first kill shot.

They brought up the utility concerns again, and when my decision stayed the same, they declared that they did not intend to renew their lease… 6 months before the lease expired. My only thought is that they were trying to intimidate me into crediting them, but our amicable business relationship had turned into a calculated battle where I was on the defense and had to act accordingly.

As the following months went by, we got drug into a conversation regarding their health concerns and my house, potential litigation threats were made, a slew of excessive repair requests were submitted, and at one point…they used a repair that I made (proactively) as leverage to pick another fight by attempting to say that a contractor knocking on their door to make a repair was a breach of their lease.

The only thing they didn’t do was burn my house down. Oh wait, they almost did that one time that they were playing with fireworks only a few inches from the side of the house. But I digress.

All issues got resolved, usually to my benefit. They were grabbing for straws, but I was maintaining the control. Things were fine.

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My response when my prop manager said they’re horrible.

In tandem, my property management team  informed me that these people were in the top 5 worst tenants they’ve ever had. Finally, somebody validated what I was thinking this entire time.

Let’s be real. My house is a NICE house. It’s in a desirable area and it has high end updates throughout. I’m not running a slum-shop…so I never expected such petty and lowbrow tenant complaints. Yet, here we are.

This week, they made a very bold and aggressive accusation…and I’ve got to do what I have to do.

A couple of hours ago, I told my property manager that I want to give them the option to end their lease 3 months early. We still have not recouped the cost of the HVAC (we are about $3,000 in the hole due to all the other repairs), and we could certainly use the rental income for a bit longer, but at a certain point… I’ve got to think with my wallet.

Even though they pay on time and our lease is still in full effect, the tenants are unhappy and making tons of complaints that are costing us financially…the big picture is that they are unhappy. Unhappy tenants do not care for my $170,000 home. They do not carefully move furniture around on the floors to avoid scratches and rips, discourage their pets from causing damage, clean up spills, smoke outside, or landscape. Unhappy tenants cost more than frustration and repair requests…they cost serious, serious damage.

Ultimately, if them moving out early makes them happy and gives me the opportunity to find an appreciative tenant…then it’s worth the effort.

 

What I Have Learned.

True story: Shortly after high school, I knew somebody who broke up with their girlfriend…over a text…while said girlfriend was hanging out at that person’s house (the person I knew was at work, or with another girl, I don’t know and don’t care. But they weren’t at their home). Naturally, the girlfriend became enraged and destroyed their apartment…then went home to her own place, leaving the person I knew with a mess to cleanup.

I did not want to repeat this in my own house.giphy

They lived there. They have the door keys. They have nothing to lose. I’ve got half of my life savings tied up in that house. Even though there were times where I wanted to reach out and tell them where they can shove their lease, that’s irresponsible, unprofessional, and unbecoming.

As of now, we’re still thousands of dollars in the hole, but sometimes…your investments don’t yield immediate returns. If it wasn’t for the HVAC, we’d likely be in the positive–but I also knew the HVAC was living on borrowed time.

On the plus side, the rental income helped bolster our living expenses while I got established in my new (100% commission only) job, which is something I couldn’t have done otherwise and allowed me to do a job that I absolutely love every single day.

Having an emergency fund that exceeded what I “thought” we’d spend on repairs saved the day, because you can never plan for unforeseen expenses…no matter how much you project, plan, or formulate in Excel.

I have had the desire to be a landlord for 15 years, and I put in 2 years of work to get here. I will not be letting one bad apple ruin the entire apple tree. As far as I am concerned, I got many years worth of “bad landlord” stories out of the way up front, so it’s only sunshine and rainbows from here, right? That’s how it works?

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#Optimism

I’ve already bought and planned some upgrades, lined up carpet replacing, painting, landscaping, and professional cleaning.

Basically, I am going to flip that house in a weekend and get it rented once again…just in time for the next mortgage payment to be due. I’ll report back once I get the keys to my house and can assess the recon needed.

Just as getting your finances in order is important, so is screening your tenants.. It can be tempting to accept the first qualified renter willing to throw you a check, but getting the right people in the door will make the next few years of your life easier than ever. Mine have been a headache, but as of now…they still pay on time, and that’s worth something.

Moral of this story, be over prepared and under-emotional about investment and rental properties. You’re operating a functioning and profitable business, not creating an HGTV show.

…and get insurance. Lots of insurance.

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