Why do first time landlord’s make this mistake?
What’s one of the first things you learn when you start investing?
Come on, I know you know what I’m talking about!
You typically hear stuff like:
Diversify you holdings
Don’t put your eggs in one basket
Make sure you have proper asset allocation
So why do people throw this advice out the window when they decide to invest in rental properties?
The first thing they do is…
Save up some money or go get financing to buy a multi-family property. Now don’t get me wrong there is a time and a place to get a double, triple or 4 family home in your real estate portfolio.
However, the very first property is not that time.
Well, because you’re putting all your eggs in one basket and typically tenants in multi-family units turn over at a much higher clip.
Tenant turn over is a money burner. Every time a tenant leaves you have to spend money to prepare for a new tenant. This is money that you probably won’t see again, and it eats away at your returns.
Now imagine this, if you have tenants with government assistance, like section 8 (Housing choice voucher) like I talked about in this article. You have to get your home re-inspected every time you get a new tenant. This is a return killer!
Look what my reader Joe had to say about the section 8 inspection process:
While I agree that there are many benefits of working with Section 8 folks as a landlord, it is important to consider the downsides. A good friend of mine with no landlord experience bought two 4-flats a few years back, and he experienced considerable challenges with the wear & tear on his newly renovated property. Specifically, the majority of the units ended up being rented by families with so many kids, that the kids would draw on the walls, ride their bikes inside and crash them into the walls, among other damages. Now don’t get me wrong, obviously anyone with kids can cause the same kind of damage, however many would agree that statistics show Section 8 renters tend to be a bit more difficult to work with in regard to damages. So, what’s the big deal, right? Well during routine inspections, the newly renovated units were quickly in disrepair and the landlord was denied rent payments by Section 8 until repairs were made. Specifically, some of the chipped paint caused by the kids riding their bikes inside the units.
In conclusion, I don’t want to deter anyone from taking on Section 8 renters, but I do suggest landlords take every potential hurdle into consideration before thinking that being a Section 8 landlord is a virtual money train.
So, imagine the scenario above. You have your brand new shiny 4 plex and one problem tenant. That one problem tenant will ruin your returns by driving the other good tenants away by simply being his or her horrible self. Boom. Your dreams of raking the cash are gone.
Have you ever lived in an apartment with a noisy neighbor above or next to you? You didn’t like it did you? What do you do when you hate your neighbor? You move!
So, what would you do Dom?
I would focus on buying single family home properties for 70% of your portfolio. You eliminate the shared wall problem to a degree. When dealing with Section 8 tenants it’s a bit harder to determine if you have a tenant who will destroy your property or not.
The only thing I suggest in that scenario is if they mess up the newly fixed property and require you to pay out a lot of money during the annual inspection, you simply decided to kick them out. Remember leases are only in effect for 1 year with Section 8. You don’t have to keep the problem tenant.
If I turn over a perfect house to you and Section 8 finds that something is now wrong that’s outside of normal wear and tear, and you can’t pay for it, guess what? You’re not living in my property anymore!
Don’t throw good money after bad!
If you have to fix something, I rather fix it for a new Section 8 tenant that will appreciate my property.
Also, it’s easier to sell a single family home. When you by multi-family homes, you limit your buyers when selling.
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