John Goreham has been investing in rental properties for about a decade and owns a rental property company. He has used Mashvisor’s tools in the past to help with his business.
In this article, John shares with Mashvisor’s investors the 4 things that he wishes he knew before buying rental property for the first time.
What Was Buying Rental Property Like?
Buying my first rental property wasn’t something that came to me like a snap decision. My grandmother had owned a few rental units for most of my young life, and I had done some minor painting and similar work on those units. I used to watch her manage the financial part of the business. She would write out bills and prepare to go to the bank on Mondays. That was her “day off’ from her 60-hour-per-week job running a beauty parlor business. I was more prepared than some new rental property investors but woefully underprepared in some key ways.
Looking back on the origins of my rental property business, I can now clearly see that there are four specific things I wish I knew before buying my first rental property. Mashvisor asked me to share these with the hope that a new investor may benefit from these lessons learned.
The Front of My First Rental Property
Lesson One: The Importance of a Good Real Estate Lawyer
Although I knew I needed a great realtor when buying my first rental property, it turned out I needed more help. Specifically, legal help. When buying my first investment property, I had previously only bought one home, the one I lived in. That went the way most homeowners’ first home purchase does, and the lawyer we used did a fine job of organizing the sale. As any real estate investor knows, when you buy as an investment, there is more to the picture.
The first lawyer I used when buying my first rental property wasn’t a specialist in real estate investing. Sure, he was able to see that the deed was registered at closing, and he later helped me with a transfer of that to the name of my LLC. However, he didn’t know enough to set up an LLC for me before I started investing in real estate or buying rental property with no money down, nor did he charge an appropriate amount for his services. Rather, he did less work for much more money than the lawyers I have since used. Shop around for the right real estate attorney.
Lesson Two: Tax Considerations
Nobody in America involved in real estate investing wants to be an expert in tax law. Sadly, one must be at least competent with regard to legal matters in order to avoid huge blunders. It’s no fun, but you need to understand the basics of how real estate taxation and income taxation of an LLC works. Even then, you are going to need a certified public accountant and perhaps a tax attorney to help you create a plan for managing the day-to-day business receipts and annual federal, state, and local tax filings.
Here again, I lucked out when buying my first rental property. I found a great CPA/Tax attorney who helped me get established and organize my business for easy annual tax filing. More importantly, he walked me through the minefield of what to do and what not to do in order to avoid unexpected capital gains taxation. The first year I switched to a real pro, he saved me $700 in taxes that the prior accountant had missed. Be certain that you find a great tax professional and start to work with him or her before tax season.
Lesson Three: The Insurance Game
Insurance is a necessary evil. You are betting that you will someday suffer a calamity and need liability insurance or that one of your properties will suffer damage or be burned to the ground. The insurance money you pay out every year allows to you sleep at night, but every penny you spend is hopefully unused.
From the day that I bought my first rental property, I paid my insurance policies up-front every year. In my near-decade of rental property ownership, I never filed a claim. In fact, I have never filed an insurance claim of any type, ever. So, I was quite surprised when I was dropped by both insurers who had been with me from the start of my rental property business this past year.
The drops were due to two things. First, I moved in with my new wife to her already-insured home and thus dropped the insurance on the residence I sold. One of the policies was issued by my personal homeowner’s policy company, and they only do real estate investors the “favor” of insuring rentals if they also cover them personally. The second simply was getting out of the business.
Looking for a new policy, I ended up being fortunate in a few ways. All of my units were rented. Had they not been filled and under contract, the insurers told me they may have opted not to cover me. Each also asked me for my birth date, which surprised me. This was so that they could look into all of my rental property insurance policies and see if I had ever filed a claim. Had I done so, they told me they may not have covered me.
The biggest surprise was that I had been overpaying by about 30%. The best price I found (Travelers Insurance) was lower than what I had been paying by a significant amount of money. That wake-up call came late and may have cost me thousands of dollars. Now I know to shop around for the best insurance deal every few years.
Lesson Four: The Government Is Not a Real Estate Investor’s Friend
The most recent lesson came this year. Both the state and federal governments that cover my company’s operational location negated the legal contracts that I had with my tenants by enacting eviction bans. They did so by removing the only recourse available if a tenant stopped paying rent. Eviction moratoriums meant that landlords could no longer be paid for the service they provide, nor could they take action to stop this situation. This is one important thing to remember always, especially when buying rental property out of state and you are not knowledgeable about local rules and regulations.
Worse, many municipalities began working towards rent cancellation. The City Council of Ithaca, New York, with the support of the Mayor, passed rent cancellation. This act invalidated the contract that landlords had with tenants and provided no compensation to landlords. In essence, it is an illegal taking by the government. Incredibly, the measure still requires that landlords pay property taxes to Ithaca.
As a practical matter, the federal, state, and local governments in the US sided with tenants against landlords this past year. Despite the fact that landlords like me purchased empty units, renovated them at their own cost, and then provided affordable housing, the landlord became the enemy. Still, don’t let these challenges discourage you from buying your first rental property.
Had I seen these actions before buying my first rental property, I may have invested my time and capital in a different endeavor. If you are buying vacation rental property for sale as a beginner real estate investor, take a hard look at the proposed rent control and tenant rights legislation pending in your state and the local area. Make sure to learn the ABCs of buying a rental property first and go into this business with your eyes open.
The Kitchen of My First Rental Property
Conclusion
I’ve learned a lot over the years since buying rental property for the first time. In addition to the lessons above, I learned that Mashvisor has most of the tools I tried to create myself when I was starting out. If you are buying your first rental property and are trying to calculate cash on cash return or return on investment, do yourself a favor. Sign up for Mashvisor today. Starting with Mashvisor is easy.