Rental properties are not passive income.
Despite what financial pornography websites may say, rental properties and real estate investing are not easy paths to riches. People make it look easy. They may sell courses on real estate investing. You may hear it from a friend who got rich in real estate.
They may tell you to buy one property, do a cash-out refinance, and purchase another. Repeat until you have as many properties as you need to reach the passive income you want. Simple, right?
They don’t always tell you about the problems you may face or the time involved.
On top of it, we are in a long stretch where real estate values have skyrocketed. It’s easy to look like a genius now. If you were invested in real estate at any time in the last decade, it would have been very hard to lose money. It is not always like the last decade.
Let’s explore the work involved in a rental property. I recently became a reluctant landlord. I won’t go into detail about the time required to find a rental property, financing, doing a cash flow projection, looking at cap rates, etc. Those could be entire topics themselves. I’m simply going to describe the work involved to take a property you already own and turn it into a rental.
The Backstory – Not My “Passive Income” Dream
I never wanted to be a landlord. I like life as simple as possible. But, when my fiancée was matched into her residency program in Wisconsin, we had a choice – sell or rent the home.
Since we want to return to Seattle in the future, I did not want to sell. I bought it about two years ago, and it was the perfect house for us. Great location, good layout, a garage (tough to find in a townhome in Seattle), another parking spot (also tough to find in Seattle), and good natural light. I was afraid that if we sold, we wouldn’t be able to find something comparable in a few years, and even if we could, I was not sure we could afford it.
So I made the choice to rent our home.
Hire a Property Manager or Manage it Myself
I researched hiring a property manager, but going into it, I was hesitant to hire one. It was a mixed bag talking to people over the years about their property managers.
I never talked with anybody who said, “They are amazing!” At best, it was “They were okay.” At worst, it was “They charged me again, they replaced something that didn’t need replacing, and I still get contacted frequently about decisions that need to be made.”
After researching, requesting information, and talking with people, the cost was likely going to be 75% to 100% of the first month’s rent plus 7-10% of the ongoing rent. Since I was planning to list my townhome for $3,600 a month, that would equate to nearly $8,000 the first year. Depending on turnover in the next three years, the total cost would likely be $15,000-$20,000.
That felt like a good amount of money, particularly when my townhome isn’t that old, and we did a fair amount of work on it in the past two years. I’ll admit, you never know what can go wrong in a home, and I may regret the decision to go it alone, but $20,000 felt like enough wiggle room to try it. It may have been a foolish decision. Time will tell. I can always choose to hire a management company later.
The way I rationalized not paying the $20,000 is that I like learning many things first hand at least once to have the experience. Plus, if I needed to come home for something related to the house, it’s a good excuse to come home to see family and friends. I could take many flights back home for $20,000. I also have a wonderful handyperson. I can make a quick call, and he can help. Also, having friends and family in the area, I could call one of them if I needed somebody at the property quickly.
The time-consuming work likely was going to be finding a tenant. I had heard from others that once you have a tenant, less work is required unless something seriously goes wrong.
Now that I made the decision to do it alone, the real work started.
Researching Local Laws
The first step was researching local laws. Although Washington State has its own laws, Seattle has more restrictive laws. I knew this from being a renter, and I found other interesting laws through my research.
I was already aware that Seattle had a “First-in-Time” ordinance.
This law requires landlords to offer a rental agreement to the first qualified applicant who completes an application. What this means is that you can set your qualifications to just about anything you want (high credit score, high income to rent ratio, etc.), but the first person who meets the qualifications and completes an application must be offered a rental agreement.
This is different from other parts of the country where you can have 50 people apply and select the one you want. There is no selecting. You set the criteria and the first person who meets it gets the place.
I learned properties needed to be registered as soon as a tenant is in the home. Also, I learned there were maximum move-in fees, such as 10% of the first month’s rent. The move-in fees and security deposit couldn’t equal more than the first month’s rent. The security deposit could also be paid in installments. During the screening process, I couldn’t do a background check on the tenants either, but I could run a credit history.
Researching local laws was not quick. Seattle has a fair amount of literature on the government website, and I explored other forums. I’m not sure how much time I spent researching laws, but if I had to guess, it was probably 5-10 hours.
Finding a Management Tool
I’ll be the first to admit I over-research tools. I easily could have gone with Zillow’s tool and called it a day. Instead, I spent way too much time researching the perfect tool, reading reviews, and trying to decide what would work best for me.
I ultimately went with Avail. They have a free version, but I went with the $5 a month version. It handled posting the listing to multiple websites, credit history reports, verified tenant rental history, had custom leases, and made paying online easy for tenants without a fee. I’ve been happy with it.
I don’t anticipate looking for another tool in the next three years, which means the work was front-loaded.
Creating the Listing
This was a time-consuming endeavor. There are laws around what you can and should put in a listing, which took time to research.
I also needed to photograph the house. Since our stuff was still in the house, we had to rearrange and clean certain areas. Some areas had too much stuff and just didn’t show well in the photos.
When the stuff was fully moved out, I also took photos to show an empty house in case I need to find a new tenant next year. I also did a video walkthrough of the empty house in case people want a video tour, but I am not in town to give it.
Although I don’t know how much time I spent creating the listing, I am going to guess it was about 10-15 hours if I include the time I spent reading other postings to see how others positioned their rentals.
Like finding a management tool, the work is front-loaded. Now, I can use the original posting next year, including the photos.
Another time-consuming piece of the puzzle. Although I did not count how many tours I gave, it was probably around 7-9. Some were in person while others were virtual over video chat.
If I had to do it again, I probably would pick a few days and times and have people select a slot. Instead, I was doing 30 minutes here and there after work, which was not efficient.
In hindsight, I also should have listed the dimensions of all the bedrooms in the posting. Two of the bedrooms are big while one is small, and I had many three-person groups looking. I think if I had listed the dimensions, I would have weeded out some of the tours because I know the smaller bedroom was too small for a few groups.
Giving the tours was fun at first and hardly felt like work, but after the first few, it was tiring. I enjoyed it because I got to hear people’s stories and where they were coming from. There were young nurses, graduate students, and young professionals.
When you rent your home and never intended it to be a rental, it’s enjoyable seeing what gets noticed in the tours.
I found it funny that out of all the tours I gave, only one group was a group of men. The rest were women. Three groups also commented about the softness and comfort of the carpet. We sprung for the nicest carpet pad and average carpet, so it was nice hearing other people appreciated this small touch.
Assuming my current tenants are kind to our place, I hope they renew because giving tours is time-consuming and requires me to go back, turn it over, clean, and more. If I need to find new tenants next year, Seattle is wonderful in July. It’s a great time of year to visit and find new tenants.
Preparing for Maintenance and Replacing Appliances
One thing I did to prepare is that I wrote the dimensions of all my appliances and measured the spaces they are in. Since I can’t easily drive to the home, I want to be able to order appliances easily if something broke.
Now, if the microwave breaks, a bathroom fan dies, or any other major component needs replacing, I can order a replacement for the handyperson to install.
I also made a list of people who have installed appliances in the past. My handyperson can handle most things, but my water heater was installed by a different company. I wrote down their name before leaving.
I’m hoping nothing needs to be replaced, but if it does, I should be able to handle most scenarios remotely.
First Problem as a Landlord – Testing My Preparedness
I had a good test run the other day. A tenant had emailed me that the water heater was making a loud knocking sound, which it had never done while we lived in the house.
I felt bad for my tenant because it had started early in the morning and hadn’t stopped. I called the water heater company, and thankfully, someone could look at it that afternoon. I’m glad I had their name written down, or I wouldn’t have known who to call.
The problem was partially fixed. My tenant told me there were still issues, so I called the company again, and they came out the next day and fixed it fully. It required a few phone calls and coordination between my tenants and the water heater company, but overall, it was not bad. I don’t love a nearly $500 water heater bill in the first few months, but that happens.
Hopefully, repairs will be minimal over these next few years.
Summary – Final Thoughts
As you’ve read, rental properties are not passive income. I spent at least 30+ hours preparing to rent out my home for the first time. Although much of that work is front-loaded, and the same amount of time shouldn’t need to be spent on it next year, it’s not without a heavy time commitment at times.
I’m fully prepared to go back in July, hire a cleaner, walk through the house to determine if repairs need to be made, hire my handyperson, and give more tours to find a new tenant. In the meantime, if something goes wrong, I either need to spend time coordinating from afar or fly back if needed.
I can’t imagine doing this for 8+ tenants if I owned an apartment or something similar. At that point, I know many people hire a property manager, but even then, you need to coordinate with the property manager.
Hopefully, you have better insight into the time required to have a rental property. I see people tout them online as the best way to make money, but it is a huge time commitment, and I haven’t even begun to discuss the possible financial issues that could arise. It only takes one bad tenant to ruin the profits from renting the property for a year.
Money can be made in rental property, and owning real estate certainly has been rewarding over the past decade, but real estate does not always increase in value like it has, and it often requires more work than people anticipate.
If you decide owning a rental property is for you, good luck!