5 Things You Should Know Before Becoming a Landlord

5 Things You Should Know Before Becoming a Landlord

Erin Galvin
Feb 11, 2018

When my husband and I—aspiring landlords that we are—found out we could get an FHA loan to cover the purchase of a duplex, triplex, or fourplex, we thought we had it all figured out. But four months and a dozen offers later, we were still discovering surprises right and left. Here's what we wish we'd known before navigating on our less-informed, high-risk multi-family home search.

1. Uhh... the law

Read up on landlord/tenant laws in your area before embarking on this journey! Every state and city has their own quirks, and you may find that it's better to be in the city proper, or in a certain suburb. For example the City of Los Angeles has very strict rent control laws, but the adjacent cities of Beverly Hills, Culver City, Glendale, and Pasadena give landlords more rights. When you are hoping to live in one of the units yourself, if that unit is not vacant at the time of sale it is important to know what your rights are as the owner, and what the rights of the tenant(s) are. In most cases their lease continues after the sale, and if you want to occupy a unit you will need to follow certain procedures that may take up to 90 days, though your loan may require occupancy within 60 days. We had to pass on a property we really loved because we could not legally occupy the unit we liked best. In most areas a live-in landlord has more rights than an absentee, but there is still a lot to learn.

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2. The best deals don't have pictures

There are two housing markets—one for owner occupants, and one for absentee or investor landlords. A couple shopping for a single-family home may see a duplex they like and talk themselves into it so that they have an office space or a place for aging parents. But the market for a fourplex, for instance, features almost exclusively a different type of buyer—an investor who doesn't need to envision themselves making the building into a home.

Because of this dichotomy of the multi-family market, while duplex listings look more like single-family home listings (with plenty of pictures, clean spaces, and lots of information to help get you excited), the listings aimed at investors are often quite sparse. Often they'll include no more than a single photo (pulled from Google street view no less) and the most brief description. Make no mistake: This is where the deals live. In the investor market ROI (return on investment) is king, and emotions don't factor into the price.

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3. You may think of it as your house, but to your lender it's a business

We fell into the trap of emotional decision making after making up our minds to buy a triplex in a great neighborhood. Our offer was accepted, only to find that our bank (who we were pre-approved through) would not finance the purchase. Why not? We were using an FHA loan, which required potential triplexes or fourplexes to be self-sustaining from day one. That means that the rent incoming from the rented units plus the market value of our unit had to cover the mortgage with just a bit of room for the occasional vacancy. It was a shock to the system to realize that even if we could talk ourselves into sinking more money into a property we loved, the rest of the world simply wouldn't see it the same way. The way they see it, if you default on your loan they will own the property, and they want to make sure they don't lose money on it—twice, technically—should that occur.

4. You may have to make an offer without seeing inside

Tenants have the right to quiet enjoyment of their space, even if it's for sale. Between occupied units and absentee landlords, you'll be lucky to see just one unit in person before making an offer. Get used to the idea of putting in offers knowing that once you see inside you very well may pull them. The seller knows this too, and will give you time to take a look around (as well as get inspections, just like any other property) before requiring earnest money.

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5. If it was making money, it wouldn't be on the market

Why let go of a good thing, right? Most properties we saw were on the market because the financials were not working for the landlord anymore. The most common situation was a landlord who didn't raise rent for several years running—eventually finding themselves without the cash flow to keep up with repairs, and tenants who want to hang on to a good deal no matter what. Be prepared to deal with deferred maintenance, tenants paying well below market rents, or both, and adjust your offer price accordingly.

Happy house hunting!

Re-edited from a post originally published 11.12.2016 - LS

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