The Trials and Tribulations of a First-Time Landlord

The Trials and Tribulations of a First-Time Landlord
Last year, my wife and I joined the league of accidental landlords. We were upside down in our home and couldn't sell it without taking a big loss. So after relocating for work, we decided to rent our house out.

I thought it would be a simple endeavor to charge enough rent in order to cover our mortgage payment each month. But that was hardly the case when the rubber met the road. There were several important factors I neglected to take into consideration that hampered my return.

I was struggling just to break even.

With a mortgage payment of $1,400 a month, there are many things that took a bite out of my renter's payment. Forget making a profit; I was struggling just to break even.

Nickeled and Dimed by the Little Things

Because I now live several states away from my home, I had to hire a property manager to manage the house, advertise, screen and find tenants for me. Most property-management firms charge a fee equal to 10 percent of the monthly rent. So, for example, charging $1,500 in rent costs me $150 each month for the property manager. If I charged that amount in rent, I'd already be taking a loss on my mortgage.

Of course, it hasn't been all sweetness and light. After about a year as a landlord, I've already encountered maintenance and vacancy issues when my first tenants moved out. Most first-time landlords, myself included, fail to include enough money as a cushion to ride out the hiccups. I failed at first to include maintenance costs and the vacancy factor into the rent equation.

Maintenance Costs and Vacancies Can Compound the Problem

To help prevent my monthly maintenance costs from skyrocketing, I decided to purchase a home warranty, which cost me another $40 a month. Of course, I hadn't factored that into the rent my tenants paid. Last summer,
I also had to file a claim against my warrant for a $600 air conditioner part that wasn't covered.

Many experts recommend including a vacancy factor of at least 10 percent in the amount of rent charged. So, in my case, I could expect at least 30 to 60 days of vacancy every time I had to find a new tenant. To help protect my costs and build a buffer fund, I needed to charge at least 8 percent to 10 percent more in rent or else I wouldn't be able to cover my monthly mortgage payment.

Rent: A Game of Supply and Demand

Our first tenants moved out after a year, and we simply relisted the house at the same price. But we failed to take into account that comparable rents in our neighborhood had declined. It was a renters market.

Three months and two rent price decreases later, my wife and I finally found a new tenant. But the new tenants were paying almost 15 percent to 20 percent less than the previous ones. The fact that we were barely breaking even before pushed our personal profit and loss statement to the breaking point. We definitely weren't breaking even now with all the added costs and the decreased rent.

As landlords, we no longer had any pricing power on our rent. To make matters worse, we missed the refinancing window to lower our monthly mortgage payments. So if you're ever thinking about becoming an accidental landlord, it's best to refinance your home while you're still living in it. Or you have to have at least a 20 percent equity stake in it because the bank now considers it an investment property if you don't live there.

To say that my wife and I learned the hard way about being landlords is an understatement. For more than a year now, we've routinely had a negative monthly cash flow of over $150 on our rent income. It's not enough to cover our mortgage payments. We've basically been subsidizing our tenants' rent each month.

I guess it's true what they say about major purchases: The way to make the most money isn't when you sell the property. The profit comes when you save money making the purchase. The same was true for us. Because we didn't refinance or seriously consider all the costs of becoming a landlord, we pay for it every month. It's a death by a thousand cuts.

Have you ever tried your hand at being a landlord? Were you surprised at how many little costs ate away at your profit margin each month?

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This is what happens when you are forced to become a landlord (when you are not), being an absentee lanlord (using a mangament company), and when you force a single family home to be a rental (when it should not be). Rental property is totally different in price structure, financing, location, reason to buy, etc, etc,. than the house you live in. Never confuse the two. I have been a landlord for 14 years of many properties. Did it right, was able to refi or buy anything I wanted at stupid low rates, have a 99.99% occupancy rate (waiting list every year), rent increases that out paced inflation 12 of the 13 years. Never an eviction (or even close to it), less than 1% bad debt, no serious damages. In 13 years built up a portfolio of properties that is now producing so much positive cash flow, it makes no sense for me to work at my job any longer. It was a lot of work and took up most my free time doing everything at 10 places while working a full time job, but now paying off very nicely.

December 19 2013 at 5:28 PM Report abuse rate up rate down Reply

I have 25 homes that we rent and it is a full time job! About 90% of renters are great people who don't trash your home and pay close to on time but the other 10% come from HELL! We used to rent to section 8 "the city or state pays you the rent" but they destroy homes and the section 8 people do nothing to help. We had two homes last year that had over ten thousand dollars in damage including human urine that required the drywall to be removed half way up the walls. One of the homes had the copper pipes stolen and most of the doors kicked in or off. Your best tenants are families with young kids who don't have dogs or cats. We will allow small dogs but cats can ruin a home and the smell will never go away. The worst thing you can do is become a friend to them you will regret it until they leave. Also remember that you don't live there and if you put new baths and kitchens in the units they will look 20 years old in 5 years. Expect to keep 50 cents on the dollar after repairs, damage and vacancies.

December 19 2013 at 4:36 PM Report abuse rate up rate down Reply

I was a landlord for 10 years. All the articles you read are about how mean landlords are. Well, let me tell you something, tenants can be real AO's also. Drunks, partiers, property destroyers all are part of the game. During the worst snow storm of all time in Chicago, tenants called and complained that the parking lot wasn't plowed. Hey, neither were the streets. Where did they think they were going to go? Glad I'm done with it.

December 19 2013 at 3:16 PM Report abuse +1 rate up rate down Reply