Working within Corporate America, I see many folks who are enamored with the idea that they are needed. Their employees should not make decisions without consulting them. Need to take a business trip? Get an approval. Need to be reimbursed for said business trip? Get an approval. Have an idea for a better way of doing your work? Get an approval. Want to start your next project? Get an approval.
It sounds annoying but still innocuous, right?
All these approvals are “No” gates. They’re just speed bumps on the way to someone at some level saying, “no”. Just try taking action without approval though. The entire system is set up to slow down and stop any action or change.
One of the reasons I’m so intrigued by real estate is the potential for passive income. However, I’m not on the right path yet. I’ve started setting up a system where I’m needed for everything. And, it’s hard for me to change, even though I know I’m the only one in my way.
Let me explain. I suffer from several personality flaws:
- I’m cheap
- I’m too curious about how things work
- I’m slow to trust
- Did I mention that I’m cheap?
To illustrate: we bought our condo, knowing that the interior needed to be completely refreshed. My wife and I (and one of our good friends) spent almost 500 hours in 2 months tearing up carpeting, sanding, painting, installing flooring, cleaning, painting, installing trim, changing electrical outlets, painting, and managing 3 sets of contractors. And that was on top of our day jobs. We used contractors for the HVAC replacement, countertop installation, and appliance haul away and replacement. Otherwise, it was all us. I schlepped 800 sqft of flooring up 3 flights of stairs… hardly passive income. That’s personality flaws 1 and 4 coming through. We stretched our means to buy the property. We knew going into the project that we needed to stick to our renovation budget, and that meant doing a lot of work ourselves.
Tim Ferriss’s Four Hour Work Week, Robert Kiosaki’s Rich Dad Poor Dad, Paula at Afford Anything, Sam at Financial Samurai inspired us to act (affiliate links). And I know they all started small, but I learned a new appreciation for the word hustle during this project. Here’s the thing: they’ve all made it. We’re just starting. So, we don’t yet have systems in place to do the work for us.
When it came time to look for a tenant, we were hesitant to hire that out too. We were curious to know who would be enjoying our new place. (Yes, we thought of it in terms of “our”). And that’s an unfortunate byproduct of personality defect number 2. As much as we followed our newly established process for screening tenants, there was still some emotion associated with our selection. In the end, things seem to have worked out OK. And, we’re again faced with a new round of tenant screening.
We know every inch of our condo, having spent so much time renovating the place. In our area, the renting process can be contracted out for roughly one month’s rent. Each property can be managed (as a contract) for roughly 10% of the gross monthly rent. Add both of those together, and our unit becomes significantly less profitable. There’s the added uncertainty around a property manager: will they care about our property as much as we do? Will they present as good of a customer(tenant) interface as we will? See personality defect#3 at work (Probably # 4 too)? So, as much as we would like to have a better system in place, here’s what we we’re doing:
1. A pre-screening phone call. We ask 7 questions of each person interested in seeing our unit. The questions are:
- Why are you moving?
- When do you want to move in?
- Are you OK with us conducting a background check as part of the application process?
- Do you have residential and occupational references we can contact as part of the background check?
- Is your income greater than 3x the monthly rent?
- How many people/pets will be in the unit?
- Have you ever been evicted?
2. Once we believe folks are good prospective tenants, we set up a time to show them the unit. Note: I would love to transition this to an open house type of showing.
3. If they’re still interested, they fill out an application form and we proceed with background/reference/income checks. To protect everyone involved, we’re using TransUnion’s MySmartMove. We really like that our tenant’s personal information is protected: we don’t have to handle their data or worry about processing their application fees. We get to see a quick summary of their current financial obligations, payment history, and a prospective tenant score.
4. From there, we conduct rental history, employment, and income verification checks. If everything checks out,
5. We review and sign the lease. At last.
Whew! What a process! This being our first time screening tenants since the unit was finished, we had to invest a bit more effort to obtain interior photos, put up a detailed website, and prepare our listing on Zillow’s Rental Manager site. We’ve spent 13.5 hours getting that all set up. Hopefully, we’ll be able to re-use this for years to come. In terms of screening tenants and showing the unit, we’ve spent 3.5 hours and showed the condo to 3 prospective tenants. The third family submitted an application, and we’re processing it currently. Keep your fingers crossed!
In a future post, I would like to revisit more of the non-recurring effort/ongoing maintenance effort and costs that we’ve experienced thus far. From my homework in preparing to purchase this condo, I really struggled to find good data on these topics.
So, any ideas how we can systematize our rental property further and make it more of a passive income generating machine?