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I feel really weird writing about this.
First, if you would’ve told me years ago I would own two rental properties that earn us passive income, I would’ve thought you were crazy. Secondly, having lived in that property for over ten years, it’s weird thinking of it as a rental and not…home. Third, at this very moment, I’m in our new home at our dining room table with ambient music playing in the background having just banged out scheduling a flooring repair, cleaning services and a property management site visit to get our second rental property ready as soon as possible.
Soon, we’ll have our “paint guy” come in to make it look purty, call our “trash guys” to come get the leftover crap out of there and hopefully by early December, we’ll have someone else living in the place we once called home. It’s incredible what steady chipping away at a plan can do when you just stick with it.
I wouldn’t say getting this property tenant-ready was hard because honestly, it wasn’t. More than anything, it was annoying on some days going back and forth but I really have no one to blame besides myself. I’ve been so bogged down working on r&R, trying to make our home more comfortable and fighting the fall sniffles, that I didn’t attack getting the rental done as quickly or as organized as I should have. Through it all, at least four really valuable lessons are worthy of sharing—especially if you’re considering becoming a real estate investor.
1. Know which real estate investment strategy is right for you
There are several ways to invest in real estate. In general, you can flip properties where you purchase them, repair them and sell them at a premium. You can be a wholesaler where you purchase the property and sell the contract to another buyer/investor for a fee. Or you can be like us, old school buy and hold investors. Basically, we buy properties, repair them [if necessary] and rent them out to tenants.
We chose the buy and hold approach because it is a proven wealth building strategy that allows us to earn rental income more hands-off than the other two approaches. It provides us steady income, we build equity if the home appreciates and as the mortgage is paid down by our tenants. Lastly, its a great tax shelter since expenses tied to your property can be deducted. Going through this latest renovation process was a humble reminder that we made the right choice in strategy because I certainly have no interest in wielding hammers, dealing with contractors all day or looking for buyers on a regular basis. Lord knows, Mrs. r&R isn’t getting her hands dirty either since she works a traditional 9-5. Since this isn’t something we really enjoy doing, we have no reason to believe we will do it well.
2. Cash is and will always be KING
Moving into our new home has been a cash drain for us. Besides closing costs, the contractors, new furniture, supplies and more, we’ve dropped some major coins over the past 60 days, so we’re feeling a bit tight. This isn’t a HUGE deal but for years, we’ve grown accustomed to using credit cards and paying them off in full that the thought of carrying a balance introduces a stress we’ve grown unfamiliar with. Having cash on hand has always been the magic wand to make bills disappear.
Along those lines, as investors, we know that when dealing with contractors, cash is their preferred form of payment. As a result, when the work really matters to us, we’re sure to lead with that so they are more motivated to do a good job on the project. However, that approach has also added to the tightness in our wallet. All in all, this was a humble reminder of how important it is to keep cash on hand at all times. If we were being truly thorough, we would’ve set aside additional funds months ago to cover the repairs ahead of time instead of dealing with it as it comes.
3. If cash is KING, then time is QUEEN
I am so grateful to have found the courage to quit my job a few months ago because otherwise, I wouldn’t have had the time to deal with some of the issues that popped up as we were preparing to move out and renovate. A few weeks prior to leaving we had to deal with the two words any homeowner hates to hear—water damage. In short, a pipe leading into our home was leaking causing damage to our flooring. Had I not been at home and willing to deal with the repairs, I would’ve likely taken the first quote that came my way in an effort to just stop the bleeding but because I had the time, I was willing to shop around and saved us hundreds of bucks to get it fixed.
Similarly, as we were dealing with our runaway tenant on our first rental, we were provided a quote for $1K to repaint it but since I had the time, I was able to tap my network and find someone who did it for 1/3 of the original quote. Trust me, if I were working my old 9-5, there is no way I would’ve been able to do this and we would’ve spent way more than what was needed to tackle these obstacles.
4. Budgeting for repairs and vacancies:
Just like your primary home, it’s never a matter of if, but WHEN something needs to be repaired or replaced. With rental properties, you also have to build in estimated time you may not have a tenant [vacancies] and thus no income coming in. This is part of the reason we’re committed to owning debt free rentals because it boosts our profit margin and therefore our ability to absorb costly repairs when they arise. One week, you may receive a quote on a new dishwasher and the following week, you’re on the hook for the full deductible to repair a roof.
These aren’t new lessons for us but we’re more committed today than we ever have been to be better real estate investors, to crunch the numbers and build better systems to protect our investments. This means we’ll set aside a cut of profit from our rentals to serve as cash reserves for future repairs and an additional cut for long term/larger repairs better known as capital expenses. Once we hit our desired amount for each, we can re-route that extra cash to other things.
The income earned and energy given to our real estate investing has been truly passive. In fact, sometimes we feel like we’re not paying enough detail to it because we’re not knee deep in the nitty gritty details and numbers. But then we’re reminded that we have a management company and that’s what we pay them for.
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