Becoming a Landlord

Speaker 1: [0:01] Hello, hello, and welcome to another edition of the Awesome in Seattle podcast. This is Christian Awesome of the Awesome Nossum Group at Wilson Realty. And today we are talking about something that I personally am extremely passionate about. We are talking about becoming a landlord. And, you know, we'll cover both ends of being a landlord, whether it's on purpose because you bought an investment property, or maybe you just fell into becoming a landlord because you decided to keep your house instead of renting it out. So the idea of becoming a landlord can be intimidating. We all understand that. But ultimately for me, it's not only a great way to earn some passive income, but it's also a way to build long-term wealth that hopefully one day I can pass along to my kids. So today we're gonna address some of the fears that come with owning and managing rental properties, as well as give you some insight that may help you decide if becoming a landlord is a good option for you. But first, let's say hi to the team, the amazing, awesome agents of the Awesome Nossum Group. First up, we have the one, the only, the dog whisperer, Mr. Lester Cutting.

Speaker 2: [1:07] Oh, I'm first today. You are first. Hey. Hey, guys.

Speaker 1: [1:09] Hey,

Speaker 2: [1:10] hey, you threw me off. Hello.

Speaker 1: [1:14] We also have the data guru himself, Mr. Jason Saldarriaga. We do? Yes, you are here. Whoop. And last but not least, the fellow Seattle native, Ms. Reed Watson.

Speaker 3: [1:30] Hi, everyone.

Speaker 1: [1:32] So I've managed personal rental properties for over 15 years at this point. I started out house hacking. So the first two houses I actually bought were both duplexes that I lived in. I lived in one side, rented out the other. Um, for those of you that are just starting out, this an- can actually be a great way to build your real estate portfolio and add an additional source of monthly income. Now, we actually have a whole episode about house hacking. I believe it's episode 11. And it's a great way, like I said, to get into real estate and invest. Now, if you already own a home and you're trying to figure out if you should keep it as a rental, keep listening, 'cause this is gonna be great. Um, so owning rental properties can definitely have a big payoff. You know, obviously there can be some headaches involved, but in my experience, long-term, owning rental properties can have a big payoff. You can definitely have some headaches, but generally the headaches are not going to outweigh all the pros that you have. Uh, but before we get into this topic, I really wanna point out that it's really not in our best financial interest to tell people to become a landlord, because when they decide to keep their home, we don't get to make money, 'cause we are real estate agents that sell homes. So realize that going into this. We're telling you something 'cause we actually believe it, not just trying to sell you on stuff. Personally, I am a big advocate for becoming a landlord. I often advise our clients to at least explore this option of keeping their home instead of selling it, just so that they can understand and know that they, they really did explore all options versus just, you know, blindly selling. So let's get into it. Jason, why is having a rental property a good idea?

Speaker 4: [3:15] Great question, Christian. Not to say something too obvious, but the most common reason that people do rent out property is just to make money at the end of the day. Doing so can get you on the path to significant asset growth potential, at least if done right. To get started, it's really important to do your research, and fortunately, there are some really good resources out there to help you if you're contemplating pursuing becoming a landlord in some way, shape, or form. Another great reason to rent is that the money coming in on a rental will most likely increase over time. This has been particularly true for the Seattle area. We've been very fortunate here. We've seen rents go up quite significantly, very strong, very sustainably and consistently, especially since 2011 to today. So even if you aren't initially making money on a rental today, that may change in a few years when the property or the cost of living increases in value. Uh, a couple hard numbers here. The Seattle housing market gained $73 billion in value in 2020 alone.

Speaker 1: [4:29] Whoa. That's insane.

Speaker 4: [4:30] Yeah, it- when you see that number, wow, okay, wow, $73 billion. That's the growth in value last year. It is the seventh-largest market in the country. Due to the pandemic, rent rates did drop a bit in 2020 and, uh, some of early, uh, the first few months of 2021. But they are currently raising again, increasing again, and, uh, most likely will continue to do so moving forward. Uh, if you have a 30-year mortgage, your tenants could pay for your mortgage. That sounds quite nice if you ask me, and in the end, you will have a house free and clear and/or pretty steady positive cashflow c- coming in monthly.

Speaker 1: [5:12] To jump in real quick, I actually met with a seller a couple days ago in Phinney Ridge, and their next-door neighbor is a renter, and they had been there for over 31 years- Wow … paying the, the rent- Wow … every single month. Probably paid off the house for the landlord.

Speaker 4: [5:27] Lastly, just to end on my, my, uh, renting, why you'd want to rent spiel, a current looming threat that a lot of us are hearing right now in the news is the big I, inflation. Mm-hmm. This, depending on how this plays out, could dramatically impact the value of cash over time Putting money into property can be an effective way to hedge against this inflation risk. Of course, we might be real estate agents, we're not psychics, although some agents might think they are. And, um, it would be amazing to have a crystal ball and know how this would play out. But historically speaking, property has been a great way to hedge against inflation.

Speaker 1: [6:08] That is a fantastic point. Uh, I mean, you could use cash to buy a rental property, um, right now. It will maintain its value of your investment, while on the flip side, cash sitting in the bank will actually go down in value due to inflation. So using your cash, park it in in real estate, can actually really help you, uh, hedge against inflation. Another way you could use that same amount of cash would be to buy multiple properties. Instead of paying all cash for one home, use your cash as multiple down payments on more than one home. And with today's historically low interest rates, using that as leverage can really set you up for success. So in my experience, fear is the biggest thing. Fear is the biggest holdback for people, and they're afraid that their tenants are gonna mess up the house, they're gonna constantly be dealing with maintenance issues. Everyone hears of that one story that I've never actually had happen, where the toilet overflows at, in the middle of the night, and the landlord gets a frantic phone call. Yes, maybe that has happened in the past, but it's not gonna happen on every single house. So There are definitely very real fears of tenants not paying their rent, especially with eviction moratoriums in place, and that's scared some people. It can also be intimidating if you don't have experience dealing with rentals, and you simply don't know where to start. So we're gonna go over all of these things. Uh, we're gonna give you some guidance in all these areas. But let's, let's actually talk about that biggest fear. Let's talk about evictions.

Speaker 2: [7:43] All right, let's talk about it. So yes, people, they fear eviction, and it- most of the time it really stops them from making the investment, or even thinking about it, or even exploring the option. Without knowing the facts. Well, I'ma tell y- I'ma tell you the truth. Evictions are not all that common. They get a lot of airplay b- because they grab headlines, but the odds are if you become a landlord, it's really unlikely that you're gonna have to deal with it. Um, come to think of it, we have tons of folks in our office that own multiple rental properties, and I believe there's a few of them that may own 50-plus rentals. Christian, correct me if I'm wrong.

Speaker 1: [8:16] Nope, you're right.

Speaker 2: [8:17] Um, but not a single one of them has ever mentioned eviction. S- like, seriously, in the, what, maybe four years out of the six years I've been doing real estate, not a single one of these guys has mentioned eviction. They only encourage the younger agents that join our office to invest and become landlords ourselves. Mm-hmm. Um, Christian, let me ask you this. Yeah. How many evictions have you ever had on your properties?

Speaker 1: [8:36] Zero.

Speaker 2: [8:37] Zero. Okay. One thing to mention is that there's an eviction moratorium- … in Seattle through September 2021. People, I can't say this word. Ooh. Okay, I have difficulty saying it. I know what it means, but I have difficulty saying it. Eviction- Don't judge me … Speaker: moratorium. Thank you, Christian. Love ya. There you go. Um, again, but the odds are you won't have to navigate this, and if you do, there's tons of resources out there that are in favor of landlords, that help landlords out with this stuff. So Reid, what's some rules around rental properties, um, for people considering in Seattle that they should be aware of?

Speaker 3: [9:09] Well, there are a lot. The biggest thing to know is that renting or, and/or renting out your own place within the city limits is definitely different from renting outside of the city. Seattle has more rules and regulations on rental properties, so Seattle rental properties have to be registered under the Rental Registration Inspection Ordinance, or RRIO There are also limits on how much money you can require at the time of signing, so a deposit, first, last month's rent, that kind of thing, as well as rules about selecting tenants and how a landlord might screen them. So you can go to seattle.gov to find all of the RRIO information and look at all of those rules and regulations that are specific to Seattle. If these restrictions scare you, I would suggest buying a rental property outside of the city limits. There are a lot of great properties in the suburbs, and they have a little bit less regulations. So with your first rental property, getting started may seem a little bit overwhelming, but in the long term, the payoff will most likely outweigh the time that you spend getting set up to rent. And I know we're gonna talk about some property management options, so if you don't want to deal with that initial registration and inspection and setup process, you can hire a company or an individual to help you meet all of those requirements on a property, whether it's inside or outside of the city limits.

Speaker 1: [10:37] Yeah, that's a good point. I mean, a property management company could be a great option for navigating all the rules and regulations. And for those that just don't want to learn all that stuff and make sure that you're following the right procedures, that might be the right way to go. On the flip side, another way is to do it yourself. Now, there is some help out there for that as well. The Rental Housing Association of Washington is a fantastic resource, and I'm gonna read exactly what they describe themselves as from their website verbatim. So RHAWA, R-H-A-W-A, is the partner that independent rental owners and managers and manufactured housing community owners rely on for resources, legal forms, education, and industry knowledge to help them run their investments. So essentially, they are there to assist you as a landlord doing this on your own. Uh, I am personally a member of them. I pay every year. I have for 15 years at this point. Uh, they are fantastic. You can actually call them, get advice on specific things. They provide all of the leases. They provide the screening of tenants. They basically do everything. All the things that kind of scare people from being the do-it-yourself landlord, they assist with. So if you're trying to decide whether you wanna do this on your own or if you want to hire a property management company, I'd definitely look into it. They have webinars all the time teaching how to be a landlord. Uh, it's just a, it's a great resource. So let's get into helping our listeners decide if becoming a landlord is a good option for them. The first step in becoming a landlord is to determine if you are in a good position to be taking on a rental property. So Les, who might be a good contac- or candidate for becoming a landlord?

Speaker 2: [12:29] So we just mentioned this, um, before. If you're looking to buy a new home, like really take the time to explore if keeping your current home and turning it into a rental is even possible. Um, actually, as a matter of fact, personal experience, Christian's actually kind of been advising me on it, uh, these past few months 'cause we were thinking about selling. We weren't sure. Um, do we keep it? Um, I love this neighborhood, so I wanna keep it, but my fiance, she wants to sell. So I don't know. Um We're just kind of on-- We're teeter-tottering back and forth. Uh, for example, ref- we refinanced last year, and I checked the rents in the area, and if we were to buy another c- another property, keep this one, we'd have a positive cashflow on our current property. So in e- essentially, my property could basically pay for itself as our equity increases, which is nice. Mm-hmm. Um, if you're looking to create passive income, a rental property's always a great option. Passive income is money earned without active involvement. For example, your paycheck, your job, that is active income because you gotta work to get paid. If you don't work, you ain't getting paid. Mm-hmm. So there you go. That's the difference. But there's gonna be work involved with owning a rental property like anything else. But once your tenants get moved in, you're definitely gonna have money coming in without actively working on it on a daily basis, so that's a huge plus.

Speaker 1: [13:45] Yeah, hopefully. I mean, that's- Wait … that's always the goal. So holding onto your current house after you buy a new one is a really good intro into owning rental properties, and it is one that a lot of people get into. In fact, I still own the first duplex that I bought 15-plus years ago, and it's served me really well as a rental for all these years. It's, it was a great way to get into it. I knew the house really well. I knew what issues were probably gonna come up over the next few years. I knew to budget for those. Um- I knew the tricks of the house. So, you know, the front door, the key stuck a little bit and you kind of had to pull it a little tiny bit closer to you to lock it. Like, I knew all these things, and I could share those things with the tenants after they moved in. So it was, uh, yeah, it was a great way to get into, to owning rental and properties. Uh, Jason, what are some other things to consider before jumping into renting?

Speaker 4: [14:38] Something I mentioned before when we were discussing people contemplating being a landlord was the value, the importance of sitting down and doing your research. The same is true in this regard when you're contemplating a particular property. Run the numbers. How does this play out? How will this play out in the short and long term? These things are really important. You know, every property's gonna be a little different, so it's really important to sit down and analyze each one specifically. So the type of property, the location, condos versus townhomes versus single family detached homes have performed quite differently, for example, in the last year. In the long term, they also perform somewhat differently. There are sometimes rental restrictions with condos, which can limit your ability as a, an owner to rent the property out. They might say no Airbnbs. They might say the shortest rental lease term c- is six months, anything over that is allowed. There might be a wait list, like a quota basically, where if 10% of the units are rented out, that's okay, but if it goes above 10%, you have to get on a wait list and, uh, wait until your, your name gets called basically. All of these things need to be considered for each property.

Speaker 1: [15:55] Yeah, with condos, it's really tough because they do have often that rental restriction in place and, you know, maybe that, that cap, that rental cap isn't met yet, that maybe it's 20%, you're only allowed to rent out 20% of the units. It might be only at 10% right now, but, you know, in two, three years if you're thinking at that point you're gonna move out and rent it, it could be full. So it's, it's tough with r- with condos to, to really plan ahead too far-

Speaker 4: [16:22] Yeah … for

Speaker 1: [16:22] rental.

Speaker 4: [16:22] And, and those, those caps can change.

Speaker 1: [16:25] Mm-hmm.

Speaker 4: [16:25] You know, if, if the HOA votes and makes adjustments. A c- very common one we saw in the last decade was a lot of restrictions around Airbnbs, because that was a new thing that kind of popped out of nowhere In the last 10 years or so. So you do see changes over time with condos especially where you, you know maybe going in what the expectation is, but in five years those rules might be changed in your favor or not. As a result, you know, all this kind of boils down to something that's really important, which is when you're analyzing the rental potential of each property, it's really important to consider the worst case and go from there. Prepare for the worst case. Don't hope for it, but prepare for it. What if the HOA does change the rules and very much limits your ability to rent? What is the s- maybe the, the sale potential? Because you might be forced or might feel, you know, instead I'll just sell it then. Is that… That might be a great option. That might, it might make sense. You know, worst case the, I can't rent it out and it's still a good purchase So all of this stuff, by the way, an agent can help you, and, uh, especially if you found a good agent to help you buy the property in the first place, you know, they can run these numbers for you, walk you through this somewhat, a- and help guide you through all these obstacles because there's a lot of unknowns here. Something to keep in mind, sometimes the rent amount is set by the market itself and is just simply not enough to cover your mortgage. Perhaps the property won't appreciate in value over time. Maybe the numbers just don't work out after accounting for maintenance or renovations that might be necessary to get it to a point where you can rent it out, or at least to get it to a point where you can rent it out for the amount that you want per month. At the end of the day, many properties simply aren't good candidates to rent out, and so you might be running these numbers on a, on a lot of properties until you find that gem.

Speaker 1: [18:20] Yeah, exactly. The first thing to do if you're considering renting out a property is to figure out what kind of cash flow you're gonna get. Is it gonna be a positive cash flow or a negative cash flow? Is it gonna be covering the rent or not? And if it's not, that may or may not be okay with you. Like, if it's not covering the rent, well, maybe that's okay. Maybe that will allow you to keep riding the appreciation wave, and that's your goal is to hold onto it for a few years while property values increase. Um, how you figure this out, how you figure out cash flow is to first d- determine what you think you could charge in rent, and there's a lot of different tools out there to do this. Essentially, what you're trying to do is look for similar rental properties out there, see what they are getting in rent, and compare it to yours. There's tools and websites out there, like rentometer.com. You can download their app, which is Rentometer Express, and Rentometer Express is free. You put in the number of beds, you put in your address, and it gives you a range, like a speedometer almost, and that gives you a general idea. So once you do figure out your rental price, then you subtract what your mortgage payment is from that number, and that's how you figure out if you're gonna make money or lose money each month. Now, you also need to take into account that there are gonna be some potential maintenance issues that arise. You need to figure out, you know, worst case, how long will it take me to rent this? If it's gonna sit there vacant for four months, like I'm paying that mortgage without any rental income coming in for four months. That's a huge negative. So you gotta figure out all those things as well, and if, you know, best case, what's the situation gonna be? Are you gonna take care of the utilities, or is the tenant paying all the utilities? You gotta factor in all of these monthly payments as well as, you know, long-term worst case scenarios to figure out if this does make sense for you. So Reid If you, after you run all these numbers and stuff, you determine it actually makes sense for you to rent out your property, what's the process look like for actually finding tenants?

Speaker 3: [20:31] Yeah. So once you decide to rent out a house, you wanna get the tenants in there as soon as possible so you start making money as soon as possible. There are a couple ways to do that. Uh, the most obvious one is you can put a for rent sign outside of the property, especially if the sign is visible from the street, that's a great way to go. You can also run ads on websites like Zillow. They may charge you a weekly fee. It kind of depends on the area. One nice thing about Zillow particularly is that they own Trulia and Hotpads, so your rental will be listed on all three websites just for the one fee You could also post in neighborhood groups online. That's kind of a good targeted strategy, as well as just letting friends and family know that you have a rental property because somebody might always know someone.

Speaker 1: [21:17] Mm-hmm. So this takes us into what I think intimidates most people about being a landlord, and that's managing the property once you have those tenants. Now, for me, I don't feel like this is a fear that should really stop you from creating passive income and gaining all this equity. You have options out there, and there are great resources to help you manage and maintain your rental property. Now, like I said earlier, you could do this yourself with the help of RHAWA, the Rental Housing Association of Washington, or you can hire a property manager if you just wanna wash your hands of it and you don't mind paying a monthly fee to them. Uh, personally, I manage my own properties. It doesn't really take that much time. You find tenants once a year, you have them sign the lease, and then you just manage maintenance requests as needed. It's, it's really not that difficult. Now, Les, if people don't have the time or simply would rather hire someone to manage their rental, what should they do? What can they expect?

Speaker 2: [22:13] Well, I'm gonna do the shameless plug. I'm gonna plug in our property manager at our office, Wilton Real- Wilson Realty Exchange, and our property manager, Scott. You can call him. Ask one of us for his contact information if this is something you're interested in. Uh, if you're in Seattle, another local option is the Seattle Rental Group. Their fees differ between condos and houses. Um, property managent- managers will deal with tenants directly, and they're gonna address all the maintenance issues as they come up. You can even have your property manager find tenants if you'd rather not deal with that at all. Some property managers charge a percentage of the rent, which is usually between 8 and 12%, and others charge a fee for securing the lease. Uh, you pay an hourly rate depending on the time they spend on managing your property. So there you go.

Speaker 1: [22:58] Yeah. Let's go over a quick example of why, you know, owning a rental could be a great investment long-term. So let's say that your investment property's worth $700,000. And best case scenario first, let's say that you get $500 a month positive cash flow. For the past few years, prices, as you all know, have increased quite a bit. Now, let's estimate that they continue to increase for even just 7% a year. They've been going- Twice that, if not more recently. Um, but let's just say 7%. In five years, that home that's now worth 700,000 would be almost a million dollars. In five years, and you're making a cash flow. Even if you made zero, and you broke even every single month, in five years, it would increase $300,000 almost. So it- this is why owning rental properties is such a good investment vehicle. Just think about how much it could be worth in 10 or 15 years. Even if you break even, like I said, this could really be a good long-term investment. And like we talked about earlier, like the neighbor next to the seller that I spoke of in Phinney Ridge, their tenant stayed there 31 years, at least 31 years. And I know that because the owner I talked to lived there for 31 years, and that tenant had already been living there. So it might even be more. But that tenant literally paid that mortgage off for that owner. That could happen. That's not, it's not super common, but I also wouldn't say it's that unusual. It's, uh, it's, it's quite awesome owning real estate, owning investment properties, um, and it can really set you up financially long term. So I know figuring out local laws and the possibility of having to evict tenants can sound scary. In my experience, the fear of those things is actually worse than the actual process. Being a landlord, to me, and to a lot of people, is really positive. It's a fantastic way to build wealth and help ensure that you have something to pass along to your kids or your grandkids, and I encourage you to seriously consider it. And we here at the Awesome Nossum Group hope that our discussion today was a great starting point. Thank you for joining us on this episode of the Awesome in Seattle podcast. If you want to put the expertise and experience of us, the Awesome Nossum Group, to work for you, just reach out to us. Our website is awesomenossum.com. You can schedule any time right online to talk to us for free, awesomenossum.com/schedule. Thank you for listening. We hope you learned a lot, and if you have any questions, don't hesitate to reach out. Thank you. See ya.

Speaker 2: [25:29] Bye, guys.