A year ago, my wife and I took advantage of the slumping housing market and bought a house at nearly 25% less than it sold for brand new just a few years before! (The person living there had a job transfer and his employer more or less owned the house, so we got an incredible deal.)

We decided not to sell the old residence because questions occurred to me: 1) Would we also take a huge hit when selling because of the depressed housing scene? 2) Would this be a good time to rent our old house?

Because I had wanted to try my hand at an investment property for some time (and because we were in a position to buy a new house without needing the equity from our old house), we decided to take the landlord plunge. We closed on our new house on March 30, 2010, and the tenants took up residence in our old house two days later on April 1.

fixing-faucet.jpgSo how has it been? Quite good actually, but that’s not to say I won’t do a few things differently when this tenant moves out eventually.

Here are my top four changes for the next time around:

  1. I will represent myself as the property manager, not the property owner. I would like to keep a perception of separation between business and personal life. This is not to say I would lie if asked if I owned the property, but I would just refer to myself as the property manager.
  2. I will not give an option for a multi-year lease. Since this was my first time as a landlord, it gave me some comfort to think the tenant would be there for several years and I wouldn’t have to go through the process of finding a new tenant any time soon. In fact, in return for the multi-year lease, I discounted the rent.

    In hindsight (and because of advice from other real estate investors), I wouldn’t do that again. I found out that most renters will stay longer than a year anyway, so by discounting the rent, I shortchanged myself. Plus if I ever had a difficult tenant (but one who was not actually violating the letter of the lease), I would have a tough time getting rid of him.

  3. I will require that the renter hand over 12 post-dated checks for the rent up front. Rather than relying on the rent to be deposited (or mailed to me), I will require a years’ worth of rent checks, each dated the 1st of the month, January through December. This puts the burden on me to make the deposit each month, but also serves notice to the tenant that he or she better have the funds in the bank.
  4. I won’t assume the rental property will result in a tax deduction. I had heard that one of the great things about rental properties is they provide great tax deductions if you itemize (or at least that’s how I understood it). That may be true if you’re not profitable, but I was. The rental income exceeded the expenses (repairs, mortgage, depreciation, miscellaneous). So at the end of the year, because it generated a gain (even though the gain was reduced by the expenses), my rental property increased by tax burden, rather than decrease it. (This year, I’ll be sure to set aside a portion of the income for tax time in 2012!)

That’s essentially it. I might add a few other smaller stipulations in the lease, but these four are the big ones.

My experience in year one has been positive overall. There have been a few small incidents, but the time it’s taken me to resolve them has been well worth it. And in most months, I have spent no time at all on the rental, other than checking to make sure the rent was deposited. In other months, such as when I had to replace a faucet or do tree maintenance, I may have spent three to four hours.

Now just for fun, let’s crunch some numbers to see what I’m “getting paid” to rent this house. (For simplicity sake, we won’t include the income it generates — it’s too hard to predict because some years will have more expenses than others, like when I may have to replace a roof or HVAC.)

All told, I probably have averaged about an hour a month on the rental. The mortgage has 24 years left. So 12 hours a year times 24 years is 288 hours. If the house appreciates at 4% year, it would be worth $550,000 when the mortgage is paid off. However, we lived there for seven years before we rented it, which gives us about $100,000 in equity. So what does this look like per hour?

($550,000 – $100,000)/288 = $1,562/hour

Not too shabby.

Matthew Pryor

By Matthew Pryor

Matthew Pryor is in his 8th year with Sound Mind Investing, now serving as Director of Operations. He previously held the Development Director position for a crisis pregnancy center. He has also served on staff with Young Life in Virginia. He currently lives in Louisville, Kentucky with his wife and three children.

Share this article

  • Jonathan

    Congrats on taking the plunge! My wife and I bought a rental property about 6 months ago and have had tenants for about 4 months now. We got the house for about 60% less than what it sold for brand new in 2005, though we had to spend several thousand dollars getting it painted and minor rehab work.

    My thoughts on your changes:

    1) this is an interesting idea. I may try that on our next property.

    2) I’d never do this – especially not for a discount. I want to RAISE the rent after 1 year, not have it keep going at a below-market rate.

    3) I’d be interested to hear how a new tenant responds to the post-dated check idea. My wife is in property management, and I’ve never heard of that strategy.

    4) Be glad that it didn’t result in a “deduction” (which, the way you are considering it, I’d call a “loss”). Profit is good. You pay taxes on profit, but you make money.

    Also, your hourly income calculation doesn’t take into account current cash flow – is there any? Hopefully with rent increases over time you will be making positive cash flow. At some time in the next 24 years you will surely need to spend a lot of time (or money) at some point with some significant repairs.

  • lucas

    If I were a tenant, I would never agree to Number 4. It is outrageous, and how do I know you won’t clean me out, or by some fluke, not my fault, create rubber checks. This actually happened to me once when I set up a direct deposit of my paycheck to my checking account, but unbeknown to me, the bank deposited my pay into my savings account. Therefore every check I wrote bounced, but I did not know that either until the bank statement came. Big mess.

    Personally I prefer a month-to-month rather than a lease. In my experience, both crummy landlords and crummy tenants prefer leases. A month to month incentivizes both parties.

  • http://www.soundmindinvesting.com/blog/index.html SMI_Matthew

    Yep, probably a mistake on #2. Live and learn, eh?

    As for #3, me too. Hoping to get another property this year and we’ll see how that strategy goes.

    You’re right on #4, but all year-long I was thinking my takes would be lower because you always hear about lower taxes for real estate investors. And yes, there was positive cash flow, hence the increase in taxes. I’m not touching it though, letting it sit for the increases costs that will come in the future (as you pointed out).

    Congrats to you as well!

  • http://www.soundmindinvesting.com/blog/index.html SMI_Matthew

    Yeah, I can understand it may drive away prospective tenants. I guess that’s a chance I’m willing to take. Who knows, it may not work out. But I want to try and see.

    Month-to-month? As a landlord, I don’t think I’d ever do that initially… maybe after they’ve lived there X years and I know they’re looking to move. But otherwise, too much instability.

WP Socializer Aakash Web