Becoming a Landlord- Lesson Learnt

August for all means and purposes was a good month and if September could take a cue from that it would be nice. You can read our monthly update here. In August we found a tenant and became landlords ourselves.

Renting without an agent

We are the kind of people who forgo services of agents and other service providers for renting. We do this for two reasons. Firstly, it saves us some money (quite considerable in some cases) and secondly it is easier for us to do it ourselves than coordinate with others.

When we had to look for an apartment after our move to the expensive city we took it upon ourselves. We were told by many including both the renters and landlords that hiring an agent was required. We persevered and landed an apartment which costs us at least 10% less than what we had been told apartment like ours run for. Add to that paying the broker additional 1 month rent and we did land a sweet-sweet deal. The difference is enough to make up for another year’s rent hike which if not negotiated would be around 10%.

Most of the landlords who are looking for self-servicing and industrious tenants also avoid agents. This was the same case last year when we had to shift bases in the old city to be closer to office and reduce our rent. We found a cozy two bedroom place which was 10 minutes from office parking and never had any issues. We are also the kind of tenants who believe in being fair to our landlords. If it is a small repair like replacing a tap, we’ll do it ourselves. However if it is a permanent fixing which we will not be able to take away with us- the landlord pays.

Why we used an agent this time

Even after knowing and first hand experiencing the benefits of not using an agent we had to use one to find a tenant ourselves. We have a few reasons behind the decision:

  1. Our property is in another state so travelling there to vet the tenant, draw rent agreement etc. are not just bothersome and inconvenient they also cost a decent sum.
  2. The agent we found charges quite reasonable rates which are far less than what we would have spent on a trip. These charges cover for leg work of showing the house to multiple tenants, tenant background check and drawing up rent agreement to name a few.
  3. Most important reason was that the house had been empty for almost one year. Once we concluded we would not be able to find a tenant ourselves we resorted to looking for an agent/property manager to help us out.

How it went

Months after contacting the agent we were told that they finally have a tenant who is pretty interested but believes the rent is too high. We did come to a mutual agreement on a certain price and let it out. The reason we came down on our previously decided rate were two

  1. Empty property was simply eating up maintenance costs which the tenant will take off from our hands and is over and above the rent. Even though we do have a good home loan it still means some interest which will be completely taken off our hands.
  2. We would finally start an additional income stream which would help us add more to our savings.

From what our agent and tenant tells us the going rent for a furnished flat with decked out kitchen, wardrobes and other woodwork is a bit lower than what we are currently charging. After we got the possession we had thought in depth about the way we can furnish the said flat. The cheapest option came out to be buying furniture online and avoiding the hassle of a carpenter. The itch to deck the flat was real and we had to hold ourselves back from spending more money on the flat.

Our reasoning was simple; once we have a tenant lined up we can buy the furniture and get it delivered which is what we did. The couple we are renting to were in a hurry to take up the house which meant they were there when a lot of fittings were done. The furniture required will be delivered to them so our need to have a property manager went away

We have been tenants almost all our working lives and the one time we could have avoided that we moved for our job. Mr. S has rented most of his life and I have seen my family managing tenants. This means we know what real pain points are for a tenants and how much they would be ready to wait for; or so we thought.

We were not ready for the continuous communication which will be required with a 32 year old man who is unable to find a handyman we were paying for. More than that inability to coordinate with them once we find a person from 600Km baffled us. This was very different from our approach of talking to the landlord, getting stuff done and then adjusting in the rent.

Lessons learnt:

The entire year from getting the keys to our flat to finding a tenant has taught us quite a few things.

  1. It is difficult to manage a property from distance esp. another city. We believe if we had been in the same city we would have been either living in the flat or at least been able to spread the word around better and would probably not have had to pay for the agency. More than that, getting fittings done and making the flat tenant ready would have been an easy task being in the same city.
  2. It is OK to get help and pay for it. When we finally realized we would need an agency to take over the renting process it was a bit late. We would probably have had a tenant earlier if we had understood the enormity of the task sooner.
  3. Not everyone is like us. We almost always assume that every tenant thinks like us and so do all landlords. Turns out we were wrong. People have different priorities just like we want our privacy and sleep more than not having to clean ourselves.
  4. Getting another income stream started is more important than worrying about 500/- every month. This was something which was pretty difficult for me to do- reduce rent. We finally reconciled that not accepting the tenant would result in a far bigger loss especially if you add the society maintenance and electricity we had been paying.

It is definitely a happy ending with some rental income coming in and unloading of the expenses we were incurring simply by owing a flat. Not just that with a new income stream we have the capability of saving more than what we have been doing. It will take us a few months before we recover the expenses made on the flat. Post that it is pure returns on a property.

Real Estate as an Investment?

Real estate is a great option but unfortunately the returns are still not enough to tide two of us over every month. I am not including rent here, just food and other expenses. Apart from this there is the huge cost we have already sunk into the house. We have discussed viability of real estate as a retirement plan quite a few times but don’t really see it as a real option for us. Will we fare better with a few cheaper properties in addition to our desired net worth? For sure and we might be able to live with just the rent and never dip into our investments. Will that push our retirement back? Definitely. That being said we are still looking into all options and there is a possibility we might surprise you with a new property in coming years. The chances of that are low for sure.

What part of your portfolio is in real estate and how much of your retirement income do to you expect from rentals? Do you have some tenant stories you would like to share?

4 thoughts on “Becoming a Landlord- Lesson Learnt

  1. Around 90% of our portfolio is real estate. It has served us well thus far. We have a few properties, out of which only one is in India. It was our first purchase and principal place of residence once upon a time.
    We moved to another country, and though we (actually, just I) thought I would sell the property, I ended up being landlord. By the time we settled down in the new country, we realized the CG (capital growth) had been awesome and the property was never vacant for more than a month. We paid off the mortgage on this property, so the rental income was pure income (minus maintenance bills).
    To repeat the success, we bought another principal place of residence. The timing was perfect with real estate market booming, the property got some good CG. We revalued it and released some equity to buy an investment property. Repeated this twice more.
    This experience (and capital gains) has been the backbone of our planning to retire soon.
    However, I am now contemplating foray into Balanced Funds in India and/or LICs(listed investment companies) overseas, just to make sure we are not putting all the eggs in one basket.
    That’s our story.

    1. That’s great! Our property has seen good increase in value over past 3 years and we definitely believe it will go up in price as we go ahead. We did equate our loan (without prepaying it) though we realized investing it is better than avoiding interest altogether. Look into direct funds if you decide to invest in India. Most fund companies allow you to buy online without any middleman which can mean a difference of over 1% in certain funds. If you have a good real estate portfolio will Equity only fund not be a better choice? If anything you will definitely escape taxes if you make your way back to India.

      Lucky you for finding good tenants and we also hope that these tenants would turn out to be decent once they settle in. I am happy as long as we don’t have to babysit them.

  2. Oh, I noticed that I did not answer your questions.
    We are hoping to tap most of our retirement expenses from rental income.
    Fortunately, there are no really ‘bad tenant stories’ for us. There were a few not -so-god tenants who we got rid of without too much ‘Much-much’ 🙂

Leave a Reply

Your email address will not be published. Required fields are marked *