Rental Properties are a Business

Q:  Marsha, my wife and I have saved money and want to purchase some income property. We would like to start with a duplex or even a triplex. Do you have any advice for first-time landlords?

A:  There are many components and variables to learn and consider. Be sure to read and study before you make the leap. There is no better teacher, however, than actual experience. Owning rental property is a business, not a hobby or recreational pastime. As far as buying rental property in Santa Barbara, the saying goes that the way to make money in Santa Barbara rentals is to have bought 20 years ago. 

Many new landlords struggle with the realization that they must have a business relationship with their tenants; they are not friends. Establish business policies and do not deviate. Be consistent and fair with all your tenants. 

You said you have saved money? That’s good. Rental properties should be purchased with at least 30 percent down. Not only will a lender require a substantial down payment but this is also a good idea from a business standpoint. Lenders charge higher interest rates for non-owner-occupied purchases. The more money you put into the property, the better your cash flow every month. 

Speaking of cash flow, before you purchase a property, calculate all your margins and expenses. Expenses can be remembered as TIMMUR. That is taxes (property), insurance, management, maintenance, utilities, and repairs. Expenses should not be more than 50 percent of your gross operating income. If your rental market survey shows a potential rent of $3,000, expect to pay $1,500 in expenses. Even if you manage the property yourself, as many first-time landlords do, factor in the cost of paying yourself.

Find a good location. This includes researching crime statistics in the area, the school districts, employment growth, and convenience to parks, restaurants, and shopping. I strongly advise against buying a fixer or vintage property. Repairs and maintenance will cost you. 

Here is a cautionary tale of first-time landlords. A Santa Barbara couple purchased a four-plex in Santa Maria during the rising market of mid-2000. They paid $580,000 and bought four 65-year-old one-bedroom cottages in a questionable neighborhood. Two mistakes, and it never went well. They lived in Santa Barbara, which was too far away from their property for self-management.

From the first month on, they had costly plumbing and electrical issues. The tenants knew the landlords were not local. The owners would visit the property and find cars in the front yard on cinder blocks. One tenant brought his motorcycle onto the newly refurbished oak floors to work on it. Another tenant painted the inside of her cottage black with enamel paint. The police were on a first-name basis with the owners. After years and much money spent in repairs and maintenance, they were happy to sell the property for $560,000. They learned that being a landlord is a difficult business. 

The story has a happy ending, though. The couple took their hard-won knowledge and purchased income property closer to home. They are now thriving as landlords.

Do your research, purchase your rental property, and let me know how it goes. 

Marsha Gray, DRE #012102130, NMLS#1982164, has been a real estate broker in Santa Barbara for more than 20 years. She works at Allyn & Associates, real estate services and lending. To read more Q&A articles, visit MarshaGraySBhomes.com. She will research and answer all questions submitted. Contact Marsha at (805) 252-7093 or MarshaGraySB@gmail.com.

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