Year 2 (2020) of being a landlord was something else, and whew, this one was a year that I will not forget. The COVID-19 pandemic threw some challenges that I did not expect, but due to planning and the lessons I learned in Year 1, I overcame them though which has allowed a very prosperous Year 3 so far. 2020 taught me a huge lesson: the best businesses last because they prepare for the inevitable storm. That inevitable storm is any recession, pandemic, market crash, you name it. We can never know when these circumstances may come about, but that's the nature of business.
Related Article: 8 Landlord Lessons Learned (Year 1)
1. Recognizing What's Best For My Real Estate Business
I had to slow down the scaling of my real estate business due to the pandemic. Every bit of extra savings I had for each unit, I had to ensure every cent was spent wisely. This is where having a vacancy, repair, and CAPEX savings was extremely helpful. I strongly urge you to not use all of your cash flow to go straight to your pocket. At least $100 per unit needs to go towards vacancy, repairs, and CAPEX each. Your vacancy savings is to cover your mortgage in the event your currents tenants are not paying rent, or you have vacant units. Your repair savings are for minor repairs (painting, tile replacement, rodent control). No matter how low your vacancy rate is in your area, do not get too confident in thinking you'll never need a repair savings. Repairs are inevitable and so are Capex repairs. Capex is significant repairs like replacing a roof or HVAC system.
Those repairs can easily cost you $10,000. Unless you want to eat away at a whole year's worth of cash flow for a major repair, I recommend you set $100 aside a month for CAPEX. We go more in-depth on a rental property's expenses in How Much Money Should You Save Per Rental Unit. Slowing down was ok because it made me master the 5 units I have. This allowed me to take the time to get creative in maximizing the cash flow in my units. I maximized my cash flow by refinancing my Triplex, lowering my monthly mortgage payment by $100, increasing my yearly cash flow by $1200.
2. Accepting Tenants Who Use Government/Community Fund Programs to Pay Rent
I had to come to terms with the reality that many of my current tenants were not going to pay rent due to them thinking rent was "Canceled". I had mortgages to pay, and I was depleting my rental unit reserves. I searched through Youtube and found out landlords were insulating their real estate business by accepting government/community-funded (section 8) tenants. I went through getting my properties inspected by the city/organization that was providing rental assistance. This should be no problem for any decent landlord who ensures their units are within humane standards. You may need to make some repairs and adjustments within your rental unit, but I do not mind sucking that up since it guarantees that I will receive rental income from the government or non-profit organizations.
Related Article: Government Funded Programs That Help Your Tenants Pay Rent
3. What a Tenant Assertion Is Keep records (they save you)
I had tenants in one of my 2 bedroom 1 bath units that would pay their rent on time for the first six months, and you didn't hear any complaints from them. Suddenly, my property manager receives messages saying the cabinet doors are hanging off the cabinets, there's black mold in the bathroom, and there's a dead bug behind the door (can't make this up). My business partner and I personally prepared this unit ourselves, and I know unless you were hanging off the cabinets, that's the only way they could be hanging. We requested our property manager send an inspector over to identify any black mold to be found. Come to find out it was mildew in the shower due to not cleaning the tile area properly. I personally reviewed the shower and found the same result. The tenants disagreed and filed a tenant assertion (provide a backlink on what that is).
Every month, they would send their rent to an escrow account through court (or so I thought). Each month my property manager with his lawyer would go to court with them to address the issues. We fixed the discrepancies on the tenants' list but still never was receiving any rent. A few months into this issue, it was finally revealed in court that the tenants only paid one month of rent into the escrow out of the four months they were obligated to do so. The judge gave them two weeks to move out. Had it not been for proper record keeping of all correspondence between the tenant and property manager, invoices from contractor working being completed, and memos of inspections, we would not be the victor in this legal issue.
4. Find a Lawyer Who Charges a Flat Rate Fee For Rent Owed Garnishments
Lawyers can be expensive. According to lawyer.com the average lawyer costs $200-400 per hour. In my situation, the rent that is owed I wanted back. And rightfully so. The unfortunate part is I have to pay money to get my money back. Paying a lawyer at an hourly rate can be expensive, and the bill can build up on you quickly. Look for a lawyer who will give you a flat rate to handle your rent garnishment issues.
5. Sometimes DIY is Necessary
I was in the process of upgrading some of my units to give them a more modern look, and I came across a couple of contractors who I felt highly overcharged for their services. I expressed that I would like my toilet's leak to be repaired, and the contractor quoted me $225. I only paid $99 for this toilet. It made no financial sense to pay twice as much to get a repair when I could just buy another toilet and have one in storage for $225. I fixed the leak myself for $25. I'm all for outsourcing work for time management but when the numbers don't add up, save yourself the few hundred or maybe even a few thousand and do the job yourself. You may even sometimes find out you can do a better job than the contractor.
Related. Article: 10 Tips To Use When Working With Contractors
6. Your Lease Needs To Be Specific
Never leave anything left up to interpretation between you, your property manager, and your tenant when it comes to a lease. Your lease is drafted and signed between your property manager and tenant to hold ALL of you accountable. Your lease can be referred to in court and used as a tool to enforce policies. One lease policy in particular for me was having clear guidance on how much my tenant owed me if they decided to terminate their lease early. The phrasing was not clear at all on how much the tenant would have to pay.
They owed $2800 left on the rest of their lease, but I could settle for $1500 (received 4 months after they vacated the unit) since that was what they could afford. If my lease was clear on how much they would owe (3x rent), I guarantee they would've thought twice about breaking their lease. Remember that even though you may have a property manager, it is your responsibility to review the lease before the tenant signs to ensure you are in agreement. If you and your property manager already have a system in place for how you want your leases constructed, then the management on reviewing the lease is not needed.
Related Article: Lessons Learned Building a Strong Lease
7. Beware of prospective tenants who ask, "Are You A Private Owner."
When I was first asked this, I would wonder why do that matters. I asked at least 40 applicants before one of them was straight up with me and told me because they weren't trying to have their background checked for judgment (owed rent), bad credit, and a felony. Everyone deserves a second chance but understand what you are getting yourself into. I did take a chance on one tenant who did have a felony but firmly asked to be given an opportunity. My property manager and I asked for a written memo on how he got the felony and the events afterward. I actually have not had any significant issues with this particular tenant. He just needed a second chance. He is the exception and not the rule. Please keep that in mind before you end up having a tenant that provides you headaches constantly.
8. Don't Use Your Personal Phone Number to contact tenants
For the units I managed myself, I used google voice. Google voice allows your own privacy and security. Lord knows you don't want your tenant showing up to your primary residence or contacting you directly on your personal phone at any moment. To keep your relationship strictly professional, I highly recommended you use this feature.
Related Article: 6 Lessons Learned Managing My Own Rental Properties
9. Be Humane
Understand when times do get tough because of a recession, pandemic, or maybe your tenant got laid off. Have good judgment in not being taken advantage of but being understanding. I had a tenant that was laid off due to the pandemic. For several months she failed to pay her rent with no communication unless threatened to be evicted. I wanted to help her but also use an opportunity to see how committed she was. I assisted her in signing up for a rental assistance program that covered her rent for 4 months. In those four months, she failed to obtain a job and make future payments for the three other months left on her lease. This was the final straw in having my property manager put in a sixty-day notice that we would not be renewing our lease with her.
Year 2 has been full of experiences that will provide wisdom for my family and me regarding being a real estate investor and businessman. For a few months, I must admit I would have moments of discouragement, but this is where surrounding yourself around other motivated people is helpful. Be around individuals that continue to inspire.