5 Tips to Succeeding With Your First Rental Property

A nicely decorated living room

When we moved to Utah in 2004, my wife and I bought a nice little townhouse in Draper. 1300 square feet, 2 small bedrooms and a loft, 1 car garage. It fit us nicely, and was located just off of the I-15 freeway about halfway between Salt Lake City and Provo, in a growing community.

Three years later in 2007, at the peak of the housing boom, we decided it was time in buy a standalone home. We found a community we liked a few miles away, and invested in a place where we started to grow our family. While it was a terrible time price-wise to buy a house, it could have been a good time to sell our condo given the market was strong. But we had saved up just enough for a down payment on our new home, and decided we would try our luck at being landlords.

Looking back, we are really glad we kept our condo. While we had to endure the fluctuations in the housing market, and ups and downs in tenant quality, we now own an asset that will produce rental income for the rest of our lives, and through any economic cycle.

  1. Start with your primary residence. Turning your home into a rental has two benefits. First and foremost, you know the property better than anyone else, so you have a clear advantage over any other potential landlord on what risks could lay ahead, and how to help your tenants feel at home themselves. Second, you benefit financially, as you can keep your original mortgage rate (which is typically a percentage point cheaper than an investor rate), and if you choose to sell the property down the road, you may be able to benefit from reduced taxes (some capital gains can be excluded if the home was your primary residence for a period of time – but these tax laws are dynamic so study them carefully if you are planning on this).
  2. Keep it close to home. In our case, having our rental property within 10 minutes of where we live has been very handy. Everything is easier – showing it to potential renters, checking in on a needed repair, or just stopping by on occasion to see how the neighborhood is aging. This advice certainly applies if you grow your rental property portfolio as well. In 2010 during the housing downturn, I saw a short sale in my own neighborhood that I bought, which again made the rental process much easier than if I had to drive an hour away for all the work. At times I’ve been briefly tempted to consider a rental in a far off place (usually from watching HGTV and seeing prices in Texas or Georgia), but have decided to stick with what I know.
  3. Screen your renters. In our case, and for many people, the value of our condo was far and away our largest asset when compared to other investments or items we owned. Would you lend your car to someone you didn’t know or trust for a year? Why would you allow your home to be lived in by a complete stranger, or someone whom you questioned their lifestyle, cleanliness, or economic stability? Screening renters includes using an online service to run credit and criminal history, but also sitting down with them in person to talk about who they are. Trust your impressions, and don’t be afraid to screen someone out even if you have to keep a vacancy for a few more weeks to secure a tenant you feel better about. In our case, we had three different renters during our first five years with moderate challenges…followed by one really easy renter for the last six years straight.
  4. Manage it yourself. While hiring a property manager to advertise, screen tenants (although not as good as you could do it), collect rent, and deal with repairs may sound appealing, the cost can often wipe out all of your annual profits. Property managers depending on their level of service generally cost 10%-15% of rents…so $1800 to $2700 per year on a $1500 monthly rental. If you have lived in the property beforehand so know how to fix any issues, keep your rental close to home, screen your own tenants as already suggested, and collect rents by any simple online method, managing your rental really shouldn’t be too tough. In 11 years, I’ve had very minimal issues with ours, and have even done some improvement work myself (such as new counters, new flooring, and new landscaping in between renters) which has allowed us to keep the rental profits vs paying them out to service providers.
  5. Time is the key. Time is every investor’s friend, whether in the stock market or with real estate. During our decade of rental property ownership, we experienced the worst housing crisis since the Great Depression – where the value of our condo fell 30% in 2 years. But even during that time, rental income remained strong, so we actually benefited from the drop in the form of lower property taxes. Now our condo is worth about 20% above its value at the time we moved out, and we have enjoyed a rental yield of 6-7% per year, with most of that shielded from income tax due to asset depreciation. And, our mortgage has been paid month in and month out by our tenants, so soon we will own the property free and clear, producing a healthy cash return now and into retirement.

This is a guest post by Brady from Utah.


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