Now that we have purchased and moved into a new home, I have spent the last month getting the old house ready to rent.

If you read any real estate blog, you’ll likely see the words “passive income” next to rental income fairly often. I am here to tell you that my blog will NOT be one of those websites…because renting properties is far from passive, it’s hard work!

Here’s the true cost and true stories that I’ve found with my rental property in the first 30 days.

We bought this house in 2013 and intended to live in it indefinitely. It was a great house that needed a few minor updates and weekend projects to really bring out its true potential. Jay and I happily jumped on the challenge to let our interior design skills fly and work as a team.img_7059

Okay, I lied. There is quite literally nothing happy about home renovations.

HGTV always promotes the smiles and the finished product, but that’s far from the reality. If you really want to see if you should marry your significant other, I dare you to remodel a kitchen together–while still living in the house. Have you ever tried to make waffles when you’re surrounded by paintbrushes, tiles, and the remnants of popcorn ceiling… but no spatula in sight? Ugh, just ugh.

Premeditated homicide aside, our home turned out to be a great investment. We remodeled our kitchen, finished our garage, painted, opened the living room to the kitchen, replaced light fixtures over the five years that we lived there to the tune of $5,000, and enjoyed almost $40,000 in property value appreciation.

Even though we had spent so much time making the home exactly what we wanted, it didn’t take long for us to recognize that we bought the right house for the right time in our lives…but that time was over. We had become new people with new needs, and this house was starting to have less and less of the things we needed.

When we first bought it, it was one of the biggest places we had lived together. Over the years, the 1200 square feet started to enclose on us. Jay wanted a two car garage so he didn’t have to deal with the weather, and I wasn’t giving up my rightfully earned car-hole. The kitchen was a great size for the two of us, but when we started hosting monthly game nights with 20 attendees… it became a competition for standing room only. We were officially outgrowing the space.

Rather than selling the home, we decided to lease it out. Why? The answer is simple… the math made sense.

People lie. Math doesn’t.

If you’ve followed Man Vs Cash from the beginning, you know that I live by this principle. Humans can justify the logic, cost, and reasoning of virtually any decision–good or bad. We are highly susceptible to confirmation bias. If we want it to make sense bad enough, it’s suddenly going to make sense..

Numbers don’t lie. The new car makes sense when you think about how much you’ll enjoy it, but if the numbers say that you can’t easily afford the car AND your summer vacation… your answer becomes clear.

If we decided to sell the house, we’d be on the hook for realtor fees (6% of the sales price), deed transfer fees (2%), and potential repairs that the buyers requested. If the house didn’t appraise high enough, we’d still owe all of these costs–but we may also have to reduce the sales price and cut into our profits. Basically, we’d be spending no less than $14,000+ to sell. However… if we rented the house out, the figures change.

Disclosure. This is a public blog and even though I pride myself in transparency, it’s poor business sense to show my bottom lines to strangers who may/may not be a tenant of mine…so I will only speak in hypotheticals for this part.

Man Vs Cash Property Management Company, Incorporated, LLC

By renting out the house, we don’t have to spend the 14k+ to sell it. Instead, we will earn a monthly income from our tenants that covers the mortgage with plenty of cash left over. We also get to enjoy the tenants paying down our mortgage balance–so we will eventually end up with a fully-paid-off house that somebody else paid off for us.

With those piles of leftover cash, we do have to account for the following things:

  • Property management – 10% of the rent amount to pay a real estate expert to handle all things regarding the house and tenant.img_7396
  • Addresses – In Tennessee, the landlord must provide a physical address to be served legal notices by the tenant. If you have a property manager, they are your point of contact. If you’re renting it solo, you must decide if you want a post office box with a physical address (the post office doesn’t give you a physical address–you have to pay extra, usually about $300), or you can list your actual home where you sleep at night as your formal address. My two cents….never let tenants know where you live. Nothing good ever comes from that.
  • Vacancy – Your home will not be rented constantly. The standard lease is 12 months, and if your tenants move out, the home will be vacant while you clean/repaint and find/secure new tenants. The rental income stops, but your mortgage, utilities, taxes, insurance, lawn care, etc., is still due. Moral of the story, it’s smarter to save for these costs throughout the year. Be proactive, not reactive.
  • Repairs – Not just a $2 plunger and fifteen minutes of your time…but rather handyman costs. If something breaks, your tenant expects it to be repaired properly in a timely fashion. If the broken item is a safety/health item such as the only toilet, air conditioner, refrigerator, etc., you have usually 24-72 hours maximum to diagnose, dispatch, and repair it before you get into legal trouble.
  • Maintenance/Servicing – Your mortgage, homeowners insurance, and property taxes as well as chimney sweeping, HVAC servicing, pest control, fire extinguishers, smoke detectors, etc. You know, the things that need to be done annually to protect your investment.

With all costs figured in, Jay and I agreed that we must net no less than $200 per month in profit for the hassle of owning the property to make sense for us. Thankfully, we will net above that amount.

Even before we got a tenant or earned a single dollar, we went $1,500 in the hole to address issues around the house.

  • We cut back the landscaping, dismantled a flower bed, and planted new shrubbery so the tenants have less maintaining to do. Nobody will take care of your property like you, so less is best.img_7233
  • We replaced a fireplace door because the seal was broken that would result in lost heat in the winter. Lost heat means that the house costs more to warm, strains our tenant financially, and jeopardizes their ability to pay our rent.
  • We repainted multiple rooms that were dingy or got dinged when we moved out. Floorboards and ceilings, too. Have you ever scrubbed and painted baseboards in an entire house? I’d rather sit in frozen water.
  • Three days before we moved out, a ceiling fan mysteriously died. We had to replace it with a brand new one.
  • Re-keying every single exterior door.
  • Buying a trailer so we can move our lawn mower between homes, and deal with replacing large items with a moments notice such as dishwashers.

Being a landlord is so much more than cashing a check. You are operating your own company, which also means finding/funding deals, painting walls, knowing equal housing laws, and running the financials. My cost from 0 to property was lower than most, because I didn’t buy this house to rent it, but rather to live in it, so we didn’t pay much to get it rental ready. My next house won’t have this luxury.

Ultimately, I can do all of these things in my sleep because they require my attention, but do not demand an urgent reaction from me. However, people demand a reaction from me…and boy, is it tiring.

Screening Horror Stories

Let’s get to the juicy part. We always hear about the tenant/landlord horror stories. Would you imagine that I happened to find multiple “wtf” moments in my first 30 days as a landlord?

  • The Liar: I found out less than 24 hours before move-in that one of my prime applicants lied on their application. He hid assets before he filed for bankruptcy, so his ability to pay our rent dropped severely (about 70% of his income vanished). When I tried to find a solution with him, he demanded that I refund his application fees. I had to get firm and stand my ground. He got nothing. If I didn’t discover his lie, my house and financial health may be in jeopardy right now because we could only hope and wish that he was able to make rent each month. If he couldn’t, eviction is a long and expensive process that I would rather have a root canal than file for.
  • Crime Spree: You ever have that moment when somebody just creeps you out? She showed up to the showing two hours early (not kidding), asked questions about my alarm system and how many window/doors were covered, quizzed me on a neighbor’s “beware of dog” sign and what breed it was. She also saw where I was keeping my spare key–so I removed it right after she left, closed every curtain, left lights on, and asked my neighbors to keep an eye.
  • Frenemy: Somebody I casually knew from earlier in life offered me 6 months of rent up front to move in immediately, and offered to pay the rest later…without even seeing the house in person. He couldn’t state where he worked or where he was moving from, but rather he begged me to give him a chance to move in.
  • Needy Nancy: I was asked if I would consider repainting every single room because she didn’t like the colors, if I would spend $5,000 to install a fence, and if I can replace the carpets because they didn’t like the style of them. Basically, she wanted me to invest $10,000 into the house so it met her standard for 12 months. Note… I wish I was profiting $10,000 per year on that house.5cgycbmfeb-instagram
  • Time Off Tina: You’ve seen those memes saying that you’re happy to leave work. This one person debated the rental price with me over Facebook, saying that I was asking too much. When I looked at her page, it was filled literally with meme after meme of her saying she wants to be off work, or seizing opportunities to take unpaid time off.
  • Dog Dilemma: This lady’s dog changed breeds in two weeks, and I hope the dog is okay. Somebody inquired if I could accept a pitbull/boxer mix dog. I informed her that I wish it wasn’t the case, but that my insurance will not cover certain dog breeds—pitbulls being on the list. Two weeks later, she texted me again asking if I could accept a boxer mix dog. I asked what the dog was mixed with, and suddenly she “wasn’t sure”. I reminded her of our prior conversation and got no reply.
  • Totaled Trailer: Remember that trailer I mentioned having to buy? I got rear ended three weeks after buying it…and it was totaled. Thankfully, the guy who hit me was easy to work with and I was made whole.

To me, screening tenants is the most exhausting part of being a landlord. I had multiple call me at 11:45pm to try to schedule showings for the next day. There were more than a few who called me back to back to try and negotiate aspects of their application or my terms. However, for every 1 bad interaction, I had 10 neutral to great ones.

You can screen 50 people, and if you’ve screened well– you’ve saved yourself money, time, and headache. It takes one qualified tenant to make you money, and it takes one under-qualified tenant to put everything on the line.

Debt Free = Real Estate Investor

It took over a year of constant research before I finally understood how these middle class folks like myself can afford to buy multiple homes…and I will save you the 365 days I spent searching for the answer.

It’s all about Debt to Income.

As a refresher from previous posts, Debt to Income (DTI) is how much debt you owe versus how much income you bring in. The more debt you have, the more monthly payments you’re on the hook for. When you’ve got rent/mortgage, a car payment, credit cards, student loans, and installment loans—the minimum payment of all of those things go into your DTI. To figure your DTI, add up your minimum monthly payments and divide that number by your pre-tax monthly income.

As a rule, most mortgage lenders want your DTI to be below 45%…even though it’s my professional finance guy opinion to make sure that your housing costs don’t exceed 30% of it.img_7120

Since we are debt free, the only things we owed was our mortgage, and our DTI was about 16%. We built up our emergency fund, saved up money to pay down on the second house, and used the additional DTI capacity to buy the new house.

Once you’ve got your rental property leased, most consumer lenders won’t count the mortgage on the rental house against your DTI anymore. If you’re aiming to buy another home, your mortgage lender will stop counting the mortgage on your rental property against your DTI once you’ve claimed it on your taxes for 2 years. That reality enables you to count your rental profits as income, while crossing off the debt from your equations. The more money you make (at work, in other investments, or other rentals), the more income you have to offset your DTI.

Other than saving 20% of the purchase price down for an investment property, or as little as 3.5% down for a primary home if you’re leaving your current home to buy another and turning the old house into the rental (pro tip: put 20% down to avoid private mortgage insurance), that’s the secret. That’s literally it.

In a nutshell, my debt free life enables me to buy additional rental homes that other people will pay for each month. In the end, I get to keep the house, the rental profits, and all the equity that they build up for me by paying down my loan will also be mine once I sell the home. The more income I generate, the faster I can save a down payment to buy the next house that will also generate income.

After becoming debt free in February of 2018, this is the second most important move I am making to build true wealth to enjoy in my lifetime and for my loved ones to enjoy in theirs.

Personal finance is personal.

Don’t ever forget that there is not a one-size-fits-all approach to personal finance. What works for some, may not work for others.

I’ve had numerous people praise me for adding real estate to my investment portfolio, and I’ve had numerous people suggest that I sell right now and invest in other ways. Neither person is wrong. When it comes to investments—there is one critical thing to remember: Risk Tolerance.

What you’re willing to tolerate may not be the same as me. Always double check your math. Humans lie, but math doesn’t.

If your numbers are on point, then Adrian suggests that you keep on keeping on.