Tuesday, July 16, 2024
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Think of your tenants as guardians of your rental property

by xyonent
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If you own a rental property that is generating positive cash flow and is expected to appreciate in value over time, you should hold onto it for as long as possible. But the problem is, tenant issues may make you want to sell.

Being a landlord is not for everyone. In my 20 years as a landlord, I’ve seen it all, from late rent payments to damaged properties to all-night house parties that wake up the neighbors. Being a landlord has tested my belief in humanity because some tenants just don’t care.

In 2017, after my son was born, I sold my largest rental property. It was a huge headache because the only tenant I could find was a college fraternity roommate. This led to high tenant turnover and damage to the home. The tenant was also late on rent 8 times in 2.5 years.

Although selling allowed us to simplify our life, we also felt like we had failed by not holding on. This rental property was meant to be the foundation of our early retirement fund.

From my experience, I am like the CIA when it comes to screening potential tenants. I will do everything I can to ensure that potential tenants comply with the terms of the lease. I prefer to wait for the ideal tenant rather than rushing in a non-ideal tenant to minimize lost rent.

Landlord preferences for tenants change with age

In my 20s and 30s, my number one priority as a landlord was to maximize rental income. I wanted enough passive and semi-passive income to cover basic living expenses so I could leave a stressful job for good. With a lot of capital involved, I treated my rental properties as a business.

Twelve years after quitting my day job in 2012, I’m now 47 and my thinking has changed. I still aim to receive market rate rent for every tenant I transfer to my rental property, but I no longer aim to maximize rental income over the long term.

On the contrary, if I can get good tenants to stay in my property for a long time, I don’t have to raise rents to keep up with the market. I’d rather have low tenant turnover and harmony than more money.

Low turnover and harmony increases your chances of holding onto your rental property for the long term, and the best way to build wealth is to own an appreciating asset forever.

The tenant is the guardian of the property

Since I had children, it’s become easier to hold onto assets like stocks and real estate for a much longer period of time than it used to be. I’m no longer just investing for myself, I’m investing for my children’s future. I know that in 20 years, when my children enter the workforce, I’ll regret not buying stocks and real estate now. So I buy and hold stocks and real estate for them.

One of the key mindsets I’ve adopted to become a long-term rental property owner is to view my tenants as guardians of the property, not consumers. Instead of seeing my tenants primarily as a source of income, I now see them as caretakers.

Sure, renters will scratch, dent, and ding walls and doors — it would be a shame to scrape countertops or break mirrors — but having renters in your rental property increases your chances of keeping it safe from unknown disasters.

And if you can prevent costly problems from arising in your rental property, you’ll be more likely to own it for longer.

A large-scale leak caused huge damage

The first time I started to see tenants as guardians of their rental property was when a friend went to Lake Tahoe for two weeks on a ski trip with his family. This was in 2021-2022, and it was a particularly rainy season in San Francisco.

My friend returned home to find his kitchen and two bedrooms flooded, the roof leaking badly due to high winds, and it had been raining nonstop for two weeks.

My friend had to call his home insurance company to assess the damage, which determined the house was uninhabitable, and he and his family had to move to a new house for a year, during which time they had to tear out all the walls, floors, and appliances, dry out the house, and rebuild it.

If someone had lived in the house and had called a roofer or handyman as soon as they noticed the leak, my friend could have avoided a lot of trouble.

The silver lining of the leak

The only saving grace from this disaster was that my friend wanted to remodel the kitchen anyway, so at least thanks to her home insurance she got the kitchen, floors, and walls “for free” – all she had to pay was her deductible and the hard work of having two kids.

This fortunate incident is a reminder that if you have an older home, it’s worth getting replacement value insurance rather than actual cash value insurance. Replacement value insurance is more expensive, but actual cash value insurance would have only paid for the depreciation of your old kitchen, walls, and floors.

So, if you have a new or newly renovated home, consider saving money by getting actual cash value insurance for the first 10-20 years, and after 10 years you can switch to a higher replacement value policy to get the money you need to buy a new home based on your current new cost if something happens.

Your tenants are your eyes and ears to watch for anything unusual.

Landlords generally view their tenants as the ones who cause damage to the property through normal wear and tear and accidental accidents. These damages are built into the cost of running a rental property. Protection against damages can be mitigated by a strong lease agreement, rental security deposit, and tenants having renters insurance. However, despite all this, disputes can still arise.

If you have a negative view of your residents for any reason, it might help to start seeing them as your guardians. They will be your eyes and ears if something unusual happens. Once you change your perspective, you should feel better the next time you interact with them.

Some apartment owners actually hire and pay apartment managers, so in a sense you could think of it as a free service for tenants, but of course, it’s not quite the same.

In addition to being mindful of leaks, tenants should also be aware of the possibility of fire. Water and fire damage are the biggest concerns. If there are tenants in the rental property, a fire can be put out more quickly than if no one is around. There are also occasional natural disasters that happen accidentally, like a tree falling on your deck.

There’s a reason why some home insurance companies refuse to insure vacant or rented properties: they know that terrible things can happen to an unoccupied home. Your tenants and guests are your first line of defense if something bad happens.

Guardian of your rental property until your children grow up

If you have real estate investment goals, consider owning one rental property for each child, preferably in the same city as your primary residence. This way, you’ll have an affordable place to live and your children will be more likely to live nearby after they graduate from college.

A rental property can be career insurance if your children don’t get a high-paying job that will allow them to be independent. If you can’t find affordable housing, a rental property can be a place for your children to live. Finally, owning a rental property can help fund retirement, especially once it’s paid off after your children reach adulthood.

However, if your children are still young, like ours, you may have to wait 10-20 years before you can afford a rental property.As a result, owning a rental property can be a test of patience, especially if you have unsuitable tenants who don’t abide by the rental agreement.

If you are able to resolve issues with your tenant or find a new tenant after the previous one moves out, you can try to treat them as guardians by letting them know and empowering them to do so. Give them permission to make repairs up to a certain amount immediately, without your approval. This will speed up problem resolution and give them a sense of agency.

Having great tenants increases your chances of owning a rental property until your children reach adulthood, and, as with all insurance, hopefully you never need the rental property to support your children.

Quality tenants can slow wear and tear

Without insurance, a disaster can easily wipe out years of profits for a landlord. A conscientious tenant can prevent small problems from becoming bigger problems.

The value of getting a good tenant is high, so it’s worth taking the time to vet them carefully: check multiple references, verify all financials, have multiple conversations, get tenants to buy renters insurance, and write up a thorough rental agreement. It’s not worth getting an irresponsible tenant for short-term gain.

If being a landlord isn’t for you, I get it. I’ve been managing rental properties for 20 years and still have doubts every time I sign a contract with a new tenant. Every rental agreement is a leap of faith. The good thing is, it can all be worked out with time, money, and compromise.

As I get older, I do my best to minimize headaches, which has led me to invest the real estate portion of my net worth in private real estate funds, which not only give me 100% passive income and dividends, but also allow me to diversify out of expensive San Francisco and into other less expensive growing parts of the country.

Owning rental property for financial security is a test of patience, and by viewing your tenants as guardians you will be able to endure longer and be wealthier as a result.

Have you ever considered thinking of your tenants as guardians of their rental property? In what other ways have you been able to help them stay longer?

Investing Passively in Real Estate

To passively invest in real estate without the stress and hassle of dealing with tenants and maintenance issues. FundriseFundrise, which has more than $3.3 billion under management, is focused on the Sunbelt region, where valuations are low and yields are high. As mortgage rates eventually fall, demand for real estate should increase.

Falling interest rates create opportunity for commercial real estate

As always, past performance is no guarantee of future results. Only invest what you can afford to lose and what you do not need. Fundrise is a sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise.

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