There's a cycle in the landlord business that makes my life easier than for many of those who own rental income property. First of all, unlike my tax year, my tenant year doesn't start in January, it starts on the first day of February. In Florida, February brings a flood of additional people into my market. Regular winter visitors ('snowbirds') soak up rental housing along with students entering colleges. The extra demand triggers a 'landlord's market' that justifies higher prices for rents, and reduces tenants' bargaining power. As a result, each year at about this time of the year, my new rents start flowing in to begin my new year.
In the Spring and Summer, I only do maintenance on an emergency basis, or when someone is offering merchandise or services at bargain prices. That's when I'm busy buying, selling, and horse-trading properties. Autumn finds us culling houses to be sold in the fall, and closed in the next following tax year in January. This gives me another 15 months before I have to pay taxes on my gains. We also start doing repairs, replacements, and cosmetic improvements. In December, we send out all the rent-raise letters and rental contract renewals to be returned by New Year's eve; with the increases to be included in the rents due January 31st.
I can remember how, when I had a salaried job, I'd sweat out promotions. Now, all I've got to do to increase my income by several hundred dollars each month is to sit down and write a little form letter out to my tenants. I explain market conditions and review improvements made to the property. I invite them to shop around to confirm that I'm offering them a fair deal. And I adjust their rents accordingly. Rarely does anybody actually move to another rental.
The foundation of a profitable rental income property portfolio is buying the right houses 'right'. As with any investment, landlords must choose between 'value' houses that produce a high net cash flow returns at the expense of increases in value, and 'growth' house investments that yield higher capital gain on sale, but at the expense of cash flow. Each type of property has a place in the life of a real estate investor, depending upon his or her individual situation and investment objectives. What are the variables?
A beginning real estate entrepreneur, strapped for cash in short order. In real estate, leverage is the name of the game. But, even with creative financing, buying houses can soak up a lot of hard cash that must be replaced with rental income. Oh, there are lots of fables out there among the 'nothing down' crowd, but it's hard to find anybody who has actually achieved any measure of success – or cash flow – without investing a few thousand dollars in each house.
No doubt, from time to time, home owners become so beset by a sea of troubles that they just abandon their homes to the first person who comes along, but it's hard to make a living finding this level of distress when times are good as they generally are today. The 'nothing down' houses I find today are usually over-financed to the point that there's very little equity. Buying them would only mean that I'd work for years to repay money the seller had borrowed. Not smart.
Unless you are able to offer sellers reasonable down payments sufficient to meet their needs, they have little incentive to sell their home unless there are 'problems' with it. 'Problems' might include back payments that must be made up, repairs that must be made, overdue taxes, liens, etc. All of these take cash to cure. Rents are the key to recovering that cash so you can buy another house. That's why most people start out with houses that have the highest potential for cash flow rents. But, there's a price to pay in terms of management effort, personal liability, and risk of tenant litigation, vacancies, and collections.
