You know those It Gets Better videos? You could take the same sentiment and apply it to owning real estate. My last post ended with my taking cold showers in an empty house. Did I mention I had no furniture? Having bought the house in October, it was now winter, literally and figuratively. Despite the steep learning curve—turns out bleeding your baseboard radiators is less gruesome than it sounds—I never considered selling the place. I liked my neighbors. I had a decent commute. The previous owner had installed a whirlpool tub right off the kitchen … once I replaced the hot water heater, I’d be livin’ large!
Looking back, I didn’t have any kind of grand master plan to use the property as an ATM, or flip the house for fun and profit … though a fair amount of speculative activity was going on in the neighborhood at the time. In retrospect, I was lucky in that I didn’t have a lot of money to sink into the house and my goals were modest—a nice place in which to live and (slowly) grow my Net Worth. The choices I had to make then taught me financial lessons I’ve leveraged elsewhere.
First up on the to-do list was to get the house in rentable condition. Not pristine condition—rentable condition. You know the saying, no one washes a rental car? There’s some truth to that with apartments, too. My very first tenants didn’t have new stainless steel appliances (see no money above), but the apartment was freshly painted (white) and all the outlets worked. By the way, when we put our Madison house on the market this past spring, we also limited our sprucing up to a coat of (white) paint and ensuring all the outlets worked. I never understand it when people put a lot of work (i.e. time and money) into a house right before selling it. Seems like all you’re doing is taking a chance on people not liking your taste in … drawer pulls.
Next step—finding tenants. Or rather, screening tenants. Good tenants are the difference between loving real estate as an investment and … burning down the building for the insurance money. Ha! No—don’t do that. Instead, deploy some common sense on the front end. I’m always surprised when I hear about otherwise intelligent landlords who rent to tenants without running credit checks … or calling references … or asking basic questions like, why are you leaving your current residence in the dead of night? And then you wonder when things go awry!
Every issue I had collecting rent was going to directly affect my Net Worth, which I’m sure was very negative back then (I would confirm but … floppy disks). You bet I did what I could to mitigate that risk. One of my current tenants is my sister and yes, I asked her for pay stubs (I also know her guarantor, a.k.a. Mom).
Somewhat unrelated side note—one of the reasons I like owning and managing real estate is I have a bit more control over my investment than I would if I bought, say, shares of a company run by other people. I’ve worked in lots of those companies alongside lots of those people. Let’s just say publicly-traded companies might be more like rental cars, too, than you might think.
Once you have stable tenants (i.e. rental income), you can just sit back and … enjoy the depreciation. What is this? It’s an expense of running your rental business which you can use to reduce your taxable income, and thus, your taxes.
We keep an eye on those here at LBYM. Numbers to come (yay, numbers!).