- Before becoming Insider’s real-estate-investing editor, I was a small-time landlord in Chicago.
- I purchased my two-unit building in September 2015 and have had several tenants since then.
- Anxiety is a normal part of being a young homeowner and landlord. But confidence comes in time.
Imagine owning a handful of rental properties, collecting thousands of dollars each month in revenue, and spending your free time traveling across the country (or world) while enjoying the finer things in life. It sounds like a dream, right?
It certainly is a dream, and one that has lured so many newcomers in recent years to chase flip deals, value-add apartments, or short-term rentals with the hope of becoming financially independent. TikTok and Instagram are full of real-estate-investor gurus selling this dream, but tackling a multiunit property as a total newbie can be much more challenging and stressful than some would lead you to believe.
In the booming economy and real-estate market since the start of the pandemic, a record number of investors has jumped into the rental game. And it’s not just big private equity — the Blackstones and BlackRocks of the world — scooping up homes across the country. For instance, the real-estate expert John Burns told Insider that just in January investors accounted for 33% of US home sales.
While real estate can be a high-risk, high-reward type of investment, there are infinite ways to approach a budding real-estate career or business model. At Insider, we’ve interviewed numerous real-estate investors who have shared their success stories and their biggest mistakes while building a portfolio of rental properties.
At 29 years old, I packed my belongings and moved from a small one-bedroom apartment I was renting in the Logan Square neighborhood of Chicago into a two-unit building on a double lot in Avondale just 2 miles away. As a longtime real-estate reporter who has also moonlighted as a small-time landlord for the past seven years, I’ve encountered several reality checks and learned numerous lessons along the way.
While my personal and professional goals do not include building a massive real-estate empire, I still have financial-independence aspirations and believe that owning a few apartments will help me achieve this. Here are some tips I’ve learned over the past several years of being a homeowner and small-time landlord, as well as some themes I wish I would have considered before making my big purchase.
Find a good accountant and lawyer
Like so many others, I entered the world of real estate with a wide-eyed and naive perspective. When I first toured my two-unit building with my agent in the summer of 2015, I was already envisioning a fully booked calendar for an Airbnb rental in one apartment while I lived in the other unit essentially for free.
But things didn’t work out exactly as planned. And years later, some of my visions were torpedoed by my accountant, who was simply looking out for my best interests.
One of the most important lessons I’ve learned in my time as a small-time, independent landlord is that before I make any big financial decisions regarding my building — or really just anything involving real estate — I need to run everything by my accountant and lawyer first. This means discussing any plans to sell, entertaining offers from developers, opening lines of credit, or handling tricky tenant situations with these two key consultants before engaging with anyone else, particularly with agents, developers, tenants, or neighbors.
Here’s a specific example of a tough lesson learned. Shortly after I bought my building, I started getting calls and text messages from agents and investors interested in buying my property to either renovate and hold or build new condos on. My property is a double lot near a major public-transportation stop in Chicago, which translates to density bonuses for developers who build new housing near transit. To a developer whose strategy is building close to transit, there is a lot of potential value in redeveloping this site.
Before the pandemic, I had been negotiating with two separate developers who were interested in buying only the side lot to build a few condos on, while I would keep the existing two-unit building on the adjacent lot. I thought, well, if I can get one of the developers to pay me enough to cover the remaining balance of my mortgage, then I could own my building free and clear and then live off the rental income. Sounds easy enough, right? Wrong.
“This would screw everything up,” my accountant said to me when I told him about the plan to enter into a zoning-contingency contract with a developer for the side yard.
In the first year I did taxes with my accountant, he assigned different values to the building and the side yard in my depreciation schedule in order to help me get the biggest tax refund each year. He assigned a higher value to the building than to the land — which is customary — meaning I would likely owe tens of thousands in
if I sold just the side yard. And after paying
, I’d likely need another mortgage or a loan to cover what I would still owe on the house after completing such a deal.
Both properties — the multiunit building and the side yard — are under the same mortgage. So in order to sell the side yard, I’d have to come up with a plan to pay the entire mortgage off and take possession of the deeds to both properties. Additionally, my accountant said that doing a 1031 exchange, a tool to indefinitely defer tax liabilities on a recently sold property by investing that money back into another property, on a vacant-land sale wasn’t as straightforward (or ethical) as just selling the entire property.
He suggested I go back to the developer to renegotiate the deal and sell the entire property, but at this point I realized I had already screwed up and wasted everyone’s time. Even if I did sell the entire property in one deal, I’d still owe tens of thousands of dollars in depreciation recapture — essentially, I’d have to pay back much of the taxes I had written off in the years I’ve owned the property.
In the end, we decided that the smartest decision would be to kill the deal and keep the property.
‘Everything can be fixed’
Anxiety is a normal part of being a first-time homebuyer. Like my friends or colleagues who recently closed on their first property, I had stress dreams and what felt like a never-ending fear of things going horribly wrong in that first year of homeownership.
But that anxiety can multiply when you’re dealing with an older house that needs a lot of improvements. Old houses come with old problems, and there’s a reason successful flippers and buy-and-hold investors will typically do a full gut rehab of a property in one go versus doing small repairs and updates one at a time.
I remember at one point asking a close friend — who was also in many ways a mentor — how he coped with the stress of owning a building where so many things can go wrong. His response was “I just remind myself that everything can be fixed.”
While it may seem like a trivial sound bite or pithy platitude, it resonated with me and reminded me that while there are so many things out of your control, at the end of the day a house is still an object.
Adopting this mindset helped to not only set me more at ease but improve my relationship with my tenants. Instead of being overbearing and worrying about whether someone closed the windows before a torrential downpour or whether people were damaging the walls by hanging heavy objects from them, I simply stopped thinking about it.
Over time the anxiety lessens, particularly as you discover that, indeed, everything can be fixed. This isn’t to say that everything can be fixed cheaply, but for a regular old balloon-frame building like mine, there isn’t anything that is particularly unique or rare that would be detrimental to the value or integrity of the property should it be updated or repaired.
And as you build more confidence, you can leave for weeklong vacations and not allow stress about your house to impede your rest and relaxation. It can truly be out of sight and out of mind.
Set reasonable expectations and stick to them
In real estate, there’s a huge divide between the imagined and the reality of homeownership. In a culture where HGTV makes an extensive gut-rehab job look like a piece of cake (and a ton of fun), buyers often will find themselves way in over their heads by jumping into a major project without careful consideration and due diligence.
Decide what your main goals are, and try to look at least three years out and determine what you hope to achieve during that period. What projects make the most sense to tackle first? Are you trying to leverage your first asset to help pay for additional properties? How much can you realistically take on yourself while working a full-time job and trying to have a life outside work? And be honest with yourself: How much home can you really afford?
Stuck on a home-improvement project or not sure where to start? View your community as a resource: Don’t be afraid to ask neighbors for help. It can take a lot of the guesswork and stress out when you’re able to share knowledge and experience to help one another succeed as homeowners and neighbors. As a person who became a homeowner and landlord on my own in my late 20s, I wouldn’t have made it this far without the help of close friends and neighbors.
When it comes to setting realistic expectations, one very important key to your success or failure as a property owner and manager is maintaining a cash reserve. Having enough cash on hand to cover the mortgage for six months will not only help you get through difficult times but help with refinancing, as there are different lending guidelines for investment properties and owner-occupied single-family homes. And don’t forget: You get what you pay for. This is especially true when it comes to the quality of building supplies and contractors.
Finally, go easy on yourself. There are highly motivated investors who set ambitious goals to acquire as many properties as possible as quickly as possible to set themselves up for financial independence in the near future. And while that business model may work for some people, it might not be for everyone. Maybe owning a duplex is more your speed. Or maybe after giving it a go, you realize perhaps being a landlord or housing provider is not for you. You won’t know for sure until you try, but be prepared to make mistakes — and then to forgive yourself and learn from them.