Reader Question: Recommended Reading for Landlords?

I received the following question via email from a reader who wants to learn the ins and outs of rental properties.

I am considering purchasing a few rental properties to generate income. I’m trying to weed through all of the books about buying and managing successful rental properties. Can you recommend one (or more?) for the novice? As a former accountant, I’m competent when it comes to discussion of financial analysis and legal considerations.

In summary, my questions:

  1. What book(s) or other resources would you recommend for learning about becoming a landlord?
  2. What book(s) or other resources would you recommend for learning about selecting successful investment properties?
  3. When it comes to books written about these topics, how old is too old? For example, is the REI for Dummies 2nd Edition from 2009 still relevant? What about Chavis’ Buy It, Rent It, Profit!: Make Money as a Landlord in ANY Real Estate Market from 2009?
  4. If you can’t recommend any books on this subject, where would you suggest I turn to next for guidance?
  5. In your personal opinion, would you recommend entering the Seattle rental market at this time? Just your anecdotal opinion, I’m not looking for legal or investment advice….

Any input you can provide would be much appreciated!

Since I do not yet own any rental properties (I would like to eventually when my family is more established), I can’t speak from personal experience on this issue, but I do have a few thoughts on the subject.

Since I haven’t read any books on the subject, I can only share how I would go about vetting potential reading material on a subject like this.

First, as you mentioned, when the book was written is definitely important. I’d probably throw out anything that came out between 2004 and 2007 since they are likely to be full of nonsense bubble thinking. For a book published in 2008 or 2009, I’d sort the reviews by date and see what people who have read it have to say about it in 2011 and 2012 to get an idea of whether it stands the test of (a little) time.

Second, I’d spend a little time researching the author(s) of any book you’re considering spending time with. Look up their previous works. Did they write opportunistic garbage during the housing bubble urging people to buy overpriced homes because “home prices only go up”? What are their credentials? Does anything substantive come up when you Google their name along with keywords like “scam” or “ripoff”?

Honestly, the principals of actual investment in real estate are fairly simple. If you buy a property that you can cash flow on day one at a decent cap rate using reasonable assumptions about rental rates, maintenance / management costs, and vacancy, you’ll do all right. In my search, I did turn up one book that looks like a decent primer of the basic math you’ll need to be proficient in: What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures by Frank Gallinelli.

As for whether I’d recommend entering the “Seattle rental market” right now… I think there are definitely good deals to be had as potential rentals. Keep in mind, most of these deals will probably require quite a bit of “elbow grease” to get them cleaned up to the point where they will command the most in monthly rent, so you’ll need to factor purchase plus rehab into your initial costs.

In my opinion, I’d avoid condos and townhomes all together, and definitely anywhere near the downtown core, as I haven’t seen prices on those come close to penciling out as decent rentals yet. For my money, the best potential rentals out there right now are in smaller single family homes a little further out, in places like Mountlake Terrae, Renton, Federal Way, Everett, etc.

I’m sure there are some readers out there that actually have first-hand experience as landlords in the local rental scene… What advice would you share with this reader?

[Follow-up: Advice From an 11-Year Veteran Landlord]


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

34 comments:

  1. 1

    I would recommend that the author read The Millionaire Next Door and consider the possibility of other means of wealth building besides becoming a small-time landlord. Are they paying off their credit card every month? Do they buy a car every five years or ten? Is there spending on “little luxuries” in their monthly budget that they could cut back on? These and other lifestyle changes may be a better way to accumulate wealth without the added time commitment, stress, cash flow issues (what if the property goes unrented for months on end), and possibility of legal entanglements that all come along with owning rental property. You don’t have to become a cheapskate to save money … a few modest changes here and there can really add up.

    Of course the biggest recommendation in the book is not to take on a mortgage that is too large. His rule of thumb is never take one out that’s twice your household income at the time, but this is a little impractical if you live in one of the half dozen or so expensive RE markets in America and urban vs suburban living is important to you (NYC/Boston/SEA/SF/LA/DC). And if the reader is interested in rental properties they are presumably already in a mortgage.

  2. 2
    redmondjp says:

    Oh boy . . . follow me as we step gingerly onto the minefield! My parents were landlords of several duplexes while I grew up; I was the go-to toilet fixer/outlet replacer/drain unclogger person. We generally kept the rents moderate with minimal increases, especially for good tenants that didn’t cause problems (we had the same tenants in one unit for 16 years). Early on, we had a nightmare tenant that we had to go to court to evict, and it took over a year for my dad to get the place back into move-in condition afterwards. One advantage we had was that all of the units except one were within a 5-minute walk of our home, so we didn’t even have to get into the car to go work on them, and we could always check on them as we walked by on our way to/from school and church.

    I’ve looked into being a landlord myself, but personally I would only do it for small, multiple-residence units (fourplexes cash flow really well in most cases) which are very hard to find in this area.

    I have good friends who got into the rental business in the same place as I grew up and they had multiple properties (including a few SFHs as well as a small apartment complex) back in the 1990s. They threw in the towel on the whole idea after years’ worth of dealing with druggie tenants and the continual rehab of their units. YMMV

  3. 3
    Scotsman says:

    BI says Seattle is a great place to get a deal on a foreclosure- one of the 10 best cities:

    http://www.businessinsider.com/10-best-cities-for-foreclosed-homes-2012-5#seattle-washington-2

  4. 4
    Pegasus says:

    I recommend that you buy the book “Meth Cooking For Dummies”. That way you can get knowledgeable about the behavior of your future clientele and try to stay ahead of them before they destroy your rental.

  5. 5
    ckarb says:

    I’ve read a ton of books on real estate (not mention invested myself) and only a small number are truly great. For Landlording specifically nothing else comes even close to this book, there’s a reason it’s in it’s 11th edition:

    Landlording: A Handymanual for Scrupulous Landlords and Landladies Who Do It Themselves

    However the reader also seems to express an interest in making investment decisions (a different topic), for which this is the single best resource I know, don’t let the age fool you:

    How I Turned $1,000 into Three Million in Real Estate in My Spare Time

    Lastly, I would say that investors should not make cash flow the sole focus of the investment decision. Yes, positive cash flow is a must, but remember real estate returns come from 3 sources: cash flow, pay down on the mortgage balance, and capital gains. Cash yields tend to be higher in less densely popuated areas because they have lower appreciation prospects, and hence also reward homebuyers less for owning thereby causing renters to be willing to pay higher rents. Don’t forget capital gains, it’s the part of the return that’s harder to spend and easier to save!

  6. 6
    ChrisM says:

    I’m not familiar w/ the Seattle market, but typically a metro area has a landlord association which can be far more useful than a book. Check out:

    https://walandlord.com/

    This site is currently down – http://www.rha-ps.com/ – but may be promising.

    Not sure what the current rules are, but FHA used to loan on owner-occupied multi-family up to 4 units. Were I to get into the slumlord business again, I’d only look at 4+ units. I see some pretty attractive (from a cash flow perspective) properties down here in Portland.

  7. 7
    The Tim says:

    RE: redmondjp @ 2 – That reminds me of a really nasty landlord horror story I read on Get Rich Slowly a few years back: Reader Story: The Other Side of Bankruptcy

    When someone files bankruptcy, they get what is called an Automatic Stay. This means they have protection against collection of any debts accrued before the date of file, and includes any repossession or eviction proceedings. Peter and Tara had been living in our house rent-free for six weeks, and not only could we not collect the money, we couldn’t get our house back. But if Peter had turned to us and said, “By the way the toilet is leaking”, we’d have a legal obligation to go fix the toilet and couldn’t even ask when they were going to pay the rent. Had we done so, it would have been considered harassment, and we’d have been in violation of federal bankruptcy code and then they could have sued us. Not likely, but possible.

    Peter and Tara were not eligible for bankruptcy. They still had five months to go before their last bankruptcy was old enough to allow for a new filing. It looked like they had filed for bankruptcy so they could intentionally steal rent from us. They spent $450 to file bankruptcy in order to stay in my house for free until it was dismissed (at least six weeks).

    The whole thing is worth a read for anyone thinking of getting into the landlord business.

  8. 8
    Scotsman says:

    In all seriousness, don’t even think about investing in SF rentals right now. If you want to buy a home to live in that you can afford, that’s one thing. But the economic future is way too uncertain to invest in anything but a quick flip. We may have 3-6 years of stability and some increasing prices, but beyond that is wide open, and not looking good.

    Math’s a b@tch.

  9. 9
    wreckingbull says:

    I’d like to see some examples of homes for sale today in the greater Seattle area which would give a reasonable rates of return. I have a hunch that to make it work, you may need to cater to Pegasus’ clientele mentioned in #4. Most of the landlords I know purchased their homes pre-1995.

  10. 10

    RE: The Tim @ 7 – It is possible to get relief from stay, and in any case a tenant not paying rent is hardly a reason for a landlord to not fix the property.

    The too early of a filing of bankruptcy, depending on what they’re talking about, could also make it even easier to get relief.

    That said, bankruptcy, meth labs, grow houses, messy tenants can all make being a landlord less than fun.

    My one piece of advice is to not buy a house to rent if it is on septic.

  11. 12

    By NESeattleSeller @ 11:

    1. Get a great, rock-solid lease and go over it in detail with your well qualified tenant(s).

    I would suggest using an attorney to draft the lease and give you whatever other documents you need for your property (e.g. lead based paint) or location (e.g. Seattle). Actually, I’d probably avoid Seattle proper, but still get the attorney.

  12. 13
    Scotsman says:

    RE: Kary L. Krismer @ 12

    “I would suggest using an attorney ”

    Of course you would. But if you really have a difficult tenet what difference does it make in the real world? So you get them out but they trash the house. Then they move to CA while you try to sue them? The law really only works on moral people. Force, late at night, is often more effective. ;-)

    Best bet is to avoid Seattle proper and even King County. Find a place to invest that looks more favorably on the property owner.

  13. 15
    John Bailo says:

    I would keep my money and at this point never think of “investing” in rental properties. Rents will spiral down.

    The only people who maybe, maybe could eek out some money are the charlatans who promote “vertical density” in “urban settings”.

    These people are all tied into the government and insider businesses and will find thousands of willing souls to give up their paychecks for the privilege of owning a 1 bedroom condo in South Lake Union…along with all their neighbors who will cyclically drive down each others standard of living.

    And right now each of these rats are clawing at each other trying to get that last crumb of cheese.

  14. 16
    GrizzlyBear says:

    It will be some time before all of these bubble era wannabe landlords are flushed down the toilet.

  15. 17

    By Scotsman @ 13:

    RE: Kary L. Krismer @ 12

    “I would suggest using an attorney ”

    Of course you would. But if you really have a difficult tenet what difference does it make in the real world? .

    Because you don’t want to give that difficult tenant ammunition like:

    1. Turning you in for a $10,000 (???) fine for not giving them a lead based paint form.
    2. Turning you in for a ???? fine for not giving them whatever additional notices Seattle requires.
    3. Be sued for $1,000,000+ because you didn’t instruct them on how to work a smoke detector, and their baby suffers serious burns. (I ran into someone that happened to.)
    4. Have a lease which is in some way defective, making eviction more difficult.

  16. 18
    Jones says:

    Remember the 1% rule. A rental may break-even only if you can collect 1% of the purchase prices as rent per month. Even with that you may not breakeven in King county with higher property taxes and still high home prices. You will encounter vacancy. 2 out 12 months, the property may be vacant for repair, waiting for tenant, etc. Factor in the cost bad tenants and wear and tear.

  17. 19
    corncob says:

    You cannot compete against Chinese investors who are mostly laundering money and not trying to make a significant return. This is not a game for the faint hearted and it is not 1985 where Joe Seattle Landlord can make himself wealthy by turning one rental into ten while being a bumbling moron the whole time.

  18. 20
    David Losh says:

    RE: Kary L. Krismer @ 17

    and a good lease will protect you. Keep repeating that until it makes some sense.

    How is it exactly that they prove they never got the lead base paint form? Did the land lord sign something that says that?

  19. 21

    By David Losh @ 20:

    RE: Kary L. Krismer @ 17

    and a good lease will protect you. Keep repeating that until it makes some sense.

    How is it exactly that they prove they never got the lead base paint form? Did the land lord sign something that says that?

    Seriously? Have you never been involved with a sale of a house built before 1978? Have you never given a client a real estate law of agency pamphlet? You’re really asking how a landlord documents their having given documents to a tenant?

    If the tenant makes the claim they never got something, it’s up to the landlord to prove they did. That you don’t understand how to do that rather simple task is further proof of why a landlord should have a good real estate attorney advising them.

    Rather obviously having a real estate attorney won’t protect you from all types of harm (e.g. someone cooking meth). But they will help you comply with federal, state and local laws, some of which have penalties. And they hopefully will be keeping up on the changes in the law so that you can comply with those as your tenants changeover.

  20. 22
    David Losh says:

    RE: Kary L. Krismer @ 21

    Give it a rest. Now you’re talking rookie mistake 101, the great Real Estate attorney lease.

    What was said in comment #11 is more to the point of screening your renters well. In this market land lords have that luxury, well actually it should apply any time.

    Be professional, and prudent, but most renters have rights, and land lords have responsibilities. That great lease is open to interpretation by a judge, and that isn’t the road you want to go down. The first question the judge will ask the renter is if they had an attorney review the lease.

    If you need a judge to make a judgement call on a lease you’re toast.

    A land lord is much better off being involved with the local land lords association and sticking to the basics.

  21. 23
    David Losh says:

    RE: corncob @ 19

    I want to correct this about laundering money; a lot of investors with cash are buying rental properties. The returns are very good, and the property secures the investment.

    In the next few years we will see more owner financing terms, converting those leases into mortgages. In my opinion it’s a smart move given the other investment opportunities.

    So, yes, there are more cash buyers, but there are also very good reasons to invest your cash in this market.

  22. 24

    By David Losh @ 22:

    RE: Kary L. Krismer @ 21 – Give it a rest. Now you’re talking rookie mistake 101, the great Real Estate attorney lease.

    ROTFLMAO. The real estate agent who doesn’t know how to document the fact that a document was given to someone tries to claim I’m making a rookie mistake! As Terry Bradsaw would say: Now that’s funny!

    David, you don’t know what you don’t know. When it comes to legal issues for you, that’s quite a large amount of information.

    BTW, I would agree that a landlord should be a member of the local Landlord association, but that’s not a substitute for using an attorney. The attorney I send landlord clients to writes pieces for a local association.

    http://www.rha-ps.com/Content/NavigationMenu/Events/ToolsoftheTrade/ComplyWiththeLaw/Chris_Benis_Bio/default.htm

  23. 25

    RE: redmondjp @ 2

    Yes RedmondJP

    I’d go one further on your blog, the only way SWE might become a landlord in today’s Twilight Zone real estate market is if I had several millions laying around collecting dust….I’d buy up a whole collapsed condo association for like 25 cents on the dollar and turn ’em into affordable apartments.

    I’d also make about 10-20% of them low income tax credit units for the poor, to “totally eliminate” my capital gains as taxable income.

  24. 26

    […] received the following response via email to yesterday’s question about purchasing rental properties. The sender gave me permission to publish it in full, and since it’s so full of great […]

  25. 27
    Mikal says:

    I have owned two duplexs since 1997. I rehabbed one completely at time of purchase and fixed up the other where it was needed. I have had to occasionally paint and replace the carpets, but that is it. I have had two different tenants that caused me some issues with leaving a mess in what, 15 years. All the other tenants have been great. I currently am $2000 in the black every month and expect to pay them both off over the next 5 years. Even with the occasional issues I will be making over $40,000 a year from an investment that gives me few headaches if any.

  26. 28
    David Losh says:

    RE: Kary L. Krismer @ 24

    That great attorney you are referring land lords to is writing boiler plate for the local association, that is the best any one could, or should do.

    I know how to get a lead base form signed, and keep on file, you have no point there, you are attempting to scare people with a lawsuit. The lead base paint form is another boiler plate issue.

    I’d really like to see how we got to a point where we needed an attorney to tell us we need a lead base paint form. I know that the lead base paint disclosure has been around for a very long time, and is a part of many leases, but you say I need an attorney to tell me that.

    Next up is that great lease your attorney buddy is going to write for some one, any one.

    Here’s how it goes in court, first you need a renter to sign a disclosure that the lease is prepared by an attorney, and the renter should have an attorney review the lease. Do you have that disclosure?

    Let’s just stop there, because anything can happen at that point, because by your estimation we are all in court before a judge. When we are all in court in front of a judge anything can happen.

    You are advocating that a renter, land lord relationship be established by having a couple of attorneys hammer out the terms of a lease. Come on, give it a rest.

  27. 29

    RE: David Losh @ 28 – David, this is yet another topic you know nothing about. Statistics is another. What happened in Iraq is another. It’s getting tiring.

    The point of seeing an attorney is so that you know about the lead based paint form. That isn’t something programmed into human DNA such that we know about such things. And we don’t have little GPS devices built in either, such that we know about additional disclosures required within the city limits of Seattle. As I’ve mentioned in the past, even non-real estate attorneys don’t know about such things.

    And no, you don’t need to disclose to the tenant that the form was drafted by an attorney, and the tenant doesn’t need to have their own attorney (although it’s obviously not a bad idea). You’re just making stuff up.

    The only thing you’re right about is that when you’re in front of a judge anything can happen. That’s why it’s best to have done everything as perfectly as possible. Judges do not take kindly to landlords who don’t know what they’re doing. And the law often provides for specific penalties or liquidated damages against landlords who make mistakes.

  28. 30

    By David Losh @ 28:

    <I know how to get a lead base form signed, and keep on file, you have no point there, you are attempting to scare people with a lawsuit. The lead base paint form is another boiler plate issue.

    I'd really like to see how we got to a point where we needed an attorney to tell us we need a lead base paint form. I know that the lead base paint disclosure has been around for a very long time, and is a part of many leases, but you say I need an attorney to tell me that.

    Apparently you still need an attorney to tell you that you also need to give the tenant a lead based paint pamphlet from the EPA.

    http://portal.hud.gov/hudportal/HUD?src=/program_offices/healthy_homes/enforcement/disclosure

    Just having “boilerplate” in your lease and disclosures is not enough. The form can be found here:

    http://www.epa.gov/lead/pubs/leadpdfe.pdf

    But hey, a six figure penalty for not complying is nothing, right?

    http://www.multihousingnews.com/features/guest-column-ongoing-enforcement-initiative-is-targeting-landlords-violating-lead-based-paint-disclosure-rule/1004018663.html

  29. 31

    All this lead based paint talk brings up another topic. There are new rules for who can work on repairs where lead based paint is an issue, and notices to existing tenants when the work occurs.

    http://www.epa.gov/compliance/resources/newsletters/civil/enfalert/leadpaint.pdf

  30. 32
    David Losh says:

    RE: Kary L. Krismer @ 29

    You’re toast.

    This thread is about what to read, and your advice is to hire an attorney.

    Oh alrighty, I’m really jazzed about tomorrow, it’s really busy, so let’s take it one item at a time.

    “David, this is yet another topic you know nothing about.” How do you know that? Getting the advice of an attorney is extremely helpful, and I have said so many times, but this thread is about new land lords educating themselves.

    “The point of seeing an attorney is so that you know about the lead based paint form.” the point of this thread is for people to educate themselves, and they should,whether they see an attorney,or not.

    “And no, you don’t need to disclose to the tenant that the form was drafted by an attorney, and the tenant doesn’t need to have their own attorney (although it’s obviously not a bad idea).” You are absolutely right you don’t have to disclose anything, but if you end up in court the judge will ask if the renter was advised to have an attorney review the document in question. Try it some time, because judges just hate when a land lord tries to pull a fast one. We all hate when land lords try to pull a fast one.

    “And the law often provides for specific penalties or liquidated damages against landlords who make mistakes.” Like having an attorney handle your lease.

    Stick to the basics, educate yourself, and screen your renters. Get an attorney if you get in trouble, but you should enter the business of being a land lord like a professional, rather than a hot shot.

    Get an attorney to draw up a lease? Will it be iron clad? Do you promise?

  31. 33

    I used to be a landlord. My wife and I bought a major fixer old Victorian in Leschi in 1985 and converted it into a duplex, living in half and renting out half. My parents were landlords, and my wife’s mother was a landlord, so this wasn’t very foreign to me. Financially it worked out great. The rent paid for more than half the mortgage while the whole thing appreciated in value. We made extra mortgage payments, so that by the time we got a very good unsolicited offer to sell it in 1999, we didn’t owe that much, and whatever was left allowed us to pay cash for our smaller home with a big garden in Renton.
    But things are mostly different today in much of the Seattle area. In most places where people want to live, it’s nearly impossible to get a positive cash flow on a rental. You can do it with some of the less expensive homes, in places like Auburn, Mountlake Terrace, Skyway, Kent, etc, but not in places lie Kirkland or Greenlake.
    I also used to own some rental cottages in Soap Lake, Washington. These were very inexpensive to buy and to rent, but Soap Lake has virtually no economy, so the type of tenant who is renting a tar paper shack in Soap lake is just a little different than who’d be renting in Redmond. We had tenants who didn’t pay rent, or did very slowly, and were very rough on these tar paper shacks, which couldn’t take a lot of abuse. One tenant left and we found blood on the walls and shattered bottles everywhere. Things like this can and do happen. Most of my experiences with tenants were very positive, and I’m still friends with several, years after their tenancy ended.
    When things break, they tend to cost more to fix than you originally thought. Projects to repair or improve property usually takes longer than originally thought. You almost always need to budget a lot more than you think for these things. Landlording was very profitable for me. And I’m really glad not to be a landlord right now.

  32. 34

    By David Losh @ 32:

    Stick to the basics, educate yourself, and screen your renters. Get an attorney if you get in trouble, but you should enter the business of being a land lord like a professional, rather than a hot shot.

    Attorneys like it when people come to see them after the fact. They get to charge a lot more money fixing a mess than they get to charge avoiding the mess.

    What you’re proposing is being a hot shot rather than being a professional. Professionals know the value of getting advice from other professionals.

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