We purchased our current home (which features a separate Garden Unit downstairs) seven years ago. At the time, we were moving out of our first condo, which we decided to hold onto and rent out. With that big transition, we became rookie landlords of two rental properties at the same time! Today, we’re breaking down all of the pros and cons of our experience as landlords.
While we don’t necessarily love the term ‘landlord’ (is there a better alternative? Please let us know! In the meantime, we’ll use the term here for lack of a better option), we generally enjoy the work of being landlords. We recently wrote about our experience after one season as Airbnb hosts and thought this would also be a good time to break down our experience renting out our two annually-leased properties. As a quick refresher, here’s a brief synopsis of each unit:
Our Chicago Condo
Purchased in 2007 as a fully gutted rehab, our small but mighty condo is less than 700 square feet. However, with its high ceilings, great floor plan and ample storage, it lives much larger than the square footage implies. We made a lot of custom improvements including the semi-built-in media wall above, a fully functional studio space and even an above-the-door storage cube. We lived in the space for 7 years and have rented it out ever since. We’ve had largely great experiences leasing the home out to four sets of renters since then and are happy with our decision to hold onto the unit. It was pretty cute in its day, huh?
Our Chicago Garden Unit
Our Garden Unit is located in the lowest level of our Chicago home. We like to joke that this is the unit that made us ‘accidental landlords’. When we were originally shopping for houses, we had no interest in owning a multi-unit home, but after touring the space, we saw huge potential in all of the homes’ floors. We also saw value in being able to offset our mortgage payments with a legal downstairs unit!
Originally, a co-worker that was looking for an inexpensive city rental to ease her commute moved into the largely unchanged space. A few years later, she and her partner were ready to move on to a larger space, so we took the opportunity to give the unit a much-needed facelift to maximize space and re-work the kitchen floorplan. Since renovating the unit, we’ve leased the unit to three sets of tenants and have also had largely positive experiences!
Now that we’ve broken down our two annually-leased rental spaces, let’s further break down the pros and cons of being in this role.
1| The Financial Gains
Before we talk through the finances of owning rental properties, we’d like to mention that we do everything in our power to be the best landlords our tenants have ever had. We’ve all had a sketchy landlord or two (raise your hand, we see you!), and we want to make sure our tenants have a positive experience renting from us. To keep up our end of the lessor/lessee bargain, we respond quickly to any concerns and pride ourselves in keeping our units in great condition. When tenants move out, we put effort and care into assessing any issues, making repairs and ensuring that we maintain spaces that we would want to live in at rates that we feel are a good value. It’s a ton of work, but it’s kind of like our landlord golden rule, ya know?
For us personally, the financial benefits of owning rental units are two-fold. Over at the condo, we don’t make much of an immediate ‘profit’ on the unit. After paying the mortgage, taxes, insurance and condo association fees, we don’t really see immediate gains on the unit. It’s largely a break-even proposition for us in the short term. How we do benefit, though, is that our mortgage principal is being payed down by the rent that we receive. Not only is our unit worth a fair bit more than what we paid for it 13 years ago, we’ve also paid the mortgage’s principal down significantly, so the property becomes inherently more valuable as an asset. While we don’t make a profit, we are building long-term wealth.
The other way we benefit financially from our rentals is with the offsetting of our actual mortgage. The rental income from the garden unit covers roughly 2/3 of the mortgage on our primary home. We’re not quite living mortgage free, but we’re working toward it! Once the Two Flat project is complete, and we decide what the future of that building looks like, we’ll likely refinance everything at once and try to lower our payments further.
We’d also like to note that we realize owning investment properties is an incredible form of privilege that we openly acknowledge. We’ve hustled hard, made immense sacrifices and prioritized owning property. It’s how we’ve chosen to invest in our future, and it has worked out pretty well for us to this point. The real estate market, though, is constantly fluctuating, and we also realize that there is significant, calculated risk involved.
2| The People
It probably goes without saying that we wouldn’t take on this work if there weren’t financial benefits, but the people we’ve met throughout the process come in a close second! We’ve been lucky enough to have rented our spaces to some pretty fantastic folks. Renters of our condo have become neighborhood acquaintances that we bump into while we’re out and about. Tenants of our garden unit have become friends that we’ve stayed in contact with. Other tenants have chosen to keep a bit more to themselves and that’s totally cool, too! We simply want to ensure that we’re friendly, accessible owners and that our tenants know that they can come to us with any issues. Again with that golden rule, amirite?!
3| The Proximity
We’ve been in Chicago’s Logan Square neighborhood as long as we’ve lived in the city, which will be 14 years this fall (time flies!). We’re so passionate about this neighborhood that we’ve chosen to invest here. In fact, all of our properties even share the same zip code. Our Garden Unit is (obviously) on our property, the condo is 4 blocks away, and our soon-to-be-completed Two Flat (pictured above and which may or may not end up as a leased rental or two) is a 5 minute drive to the other side of the neighborhood. These were all specific choices to ensure that we weren’t wasting time driving all over town to get from one property to another. If rental properties are a consideration for you, keep in mind that location will play a key role in future management of the property when the items below rear their ugly head!
While we enjoy this aspect of our work, it’s certainly not without a few drawbacks. Let’s talk through the challenges and unplanned events that can make owning rental units tricky.
1| The Financial Risks
Like any investment, purchasing properties with significant inherent value involves risk. Real estate is generally thought of as a fairly stable investment, but if 2020 has taught us anything, it’s that stability should not be taken for granted! We’ve been cautious to avoid putting all of our financial eggs in one basket, but have selected real estate as our main investment focus. We just love old houses and this feels like the right place to put our energy and resources, at least for the time being.
2| The Surprises
We’ve learned a lot of lessons with our rental properties, and several of which have been unpleasant. We’ve learned that no matter how much thought and effort we put into a space, things will wear out. We’ve learned that tenants will need to move unexpectedly. And if something goes wrong with one of our rental units, it’s our responsibility to take care of it, no matter the time of day. Granted, most situations don’t call for us to drop what we’re doing and take care of things right away, but some do!
Here’s a very short list of a few surprises we’ve dealt with over the last few years:
- Unexpected Repairs | Modern appliances can be fickle, and repairs can get very expensive very quickly. We’ve had to repair the dryer in the Garden Unit laundry room, the washer in the condo and the refrigerator in the condo since we’ve been renting it. It works out to a major repair every 1.5 years or so, which isn’t all that often, but it’s never fun to hear that you’ll have to spend a few hundred dollars fixing something when you hadn’t planned on it!
- Finding Tenants | In Chicago, the rental market is at its strongest in the spring and summer. Based on tricky timing, we’ve found ourselves with a vacant unit early or late in the calendar year and have had to enlist the help of our favorite realtor to get the units leased. For example, this spring Illinois covid regulations didn’t allow us to show our occupied garden unit to prospective renters. Luckily, our tenants were wonderfully accommodating and helped us out with a couple of real-time virtual tours. But we ended up losing a month of rental income and had to pay a months’ worth of rent as commission to our realtor who helped us get the unit leased.
- Broken Leases | Early on in the renting of the condo, one of our tenants accepted a job out of state. Rather than letting us know and allowing us to work through the transition together, they chose to hire a lawyer and threaten suit unless we allowed them to break the lease based on a minor clerical error. We definitely learned a hard lesson on that one, which brings us to…
3| The Paperwork + Lease Management
In Chicago, tenants have a LOT of rights to protect them against crummy landlords. We’re absolutely in favor of this power balance that skews strongly in the favor the tenant since both Kim and I have dealt with dishonest landlords in the past. It does, however, make for a lot of hoops to jump through when it comes time to sign a lease.
We use Lease Runner to manage our properties, and it’s been great at prompting us to ensure that tenants are given all of the necessary paperwork at the time of signing. This helps us avoid a repeat of the broken leases situation above. Through Lease Runner, we’re also able to run background and credit checks and accept ongoing ACH payments automatically for a very small fee. It’s a game changer, and we highly recommend it to any property owner! (Note: We’re not being compensated by Leaserunner in any way. We’re simply big fans!)
Another useful tool for landlords and tenants alike is Domu. It’s a Chicago-based rental search engine, in which tenants can find listings based on neighborhood, budget and more. On the other hand, it’s an incredible resource for landlords, because Domu pulls together documents that need to be included with each and every lease! We talk more about in this post (from 7 years ago!). Even if you’re not Chicago based, it’s worth checking out to see if there are similar resources available for your city.
We hope this sheds a little bit of light on the pros and cons of investing in real estate for income properties. We’re not experts, but we’ve been doing this for 7 years and have learned quite a few lessons! If you’re considering investing in property or are a seasoned landlord, we’d also love to hear the ins and outs of your experiences in the comments!