If you are a new landlord or are considering becoming a landlord, the following advice is extremely helpful. This is your opportunity to learn from other landlords’ mishaps. Avoid these 10 common mistakes and you’ll be on your way to becoming a successful, seasoned real estate investor (one that makes money instead of losing it)!
1. Buying the Wrong Property
Your money is made or lost when you buy that rental property. Always remember this: If you are trying a little too hard to make the numbers work on paper, then move on. There is nothing worse than a negative cash-flow property. You might rationalize that it is still a good investment and will go up over time, but month after month of losing money starts to suck really quickly. Only buy a property that you know will cash-flow after PITI (principal, interest, taxes, insurance), repairs and vacancies!
2. Renting to the Wrong Tenants
When you have a rental property that has been vacant for over a month, and you finally get an application, it can be a relief. But do not get too excited too quickly! There is only one thing worse than a vacant rental… A rental occupied by a tenant that is tearing it up and not paying rent! You make a costly mistake (think thousands, not hundreds) when you rent to a tenant without vetting them first. You should tell the applicant that you do a credit check and criminal background check. You should ask for paystubs and other proof of income. If their story does not add up, or if they will not let you check them out, then move on!
3. Wasting Money on Unnecessary Upgrades
When I bought my first rental property, I was excited. I decided that I was going to fix it up and make it the best house on the street. I spent a lot of time and money doing landscaping, upgrading light fixtures, and doing what could be called “light remodeling.” Now 7 years later, I realize that this was a waste. The rent that the property brings in is controlled mostly by market conditions and the square foot of the property, not by the fancy shrubs I planted. Your property should be up to code, safe, and look nice. But don’t dump money into it as if it were your own home.
4. Not Checking in on Tenants
If you have not heard from your tenants in a while, it is tempting to just leave them alone as long as they are paying the rent. Sometimes you don’t want to bother them because you don’t want them to ask for repairs. This is a bad habit. If you have not heard from them in a long time, they could be destroying the place. Always check in with them every few months, and do an annual inspection of the property. It will save you a lot of money and headaches in the long run.
5. Underestimating Costs
Always assume you will have a few costly repairs every year. Air conditioners go out. Heaters and furnaces break. Plumbing issues arise with frequency. I recommend leaving extra money in your bank account (let’s call it reserves) so when something breaks you can afford to fix it.Remember, you have a legal obligation to your tenant to fix certain things, and you need to make sure that you can do it timely. Don’t rent your property and assume that your repairs will be minimal… they won’t be!
6. Not Using a Lease
Don’t rent to a tenant without a good residential lease. If you do, by default your state’s laws will dictate the terms of your agreement with that tenant, which may not be favorable to you. The tenant will also most likely be deemed to be in a month-to-month tenancy, which means they can leave at any time with a month’s notice to you. By you using a lease, you can put terms and conditions in the lease that are favorable to you, and you will know that the property will be occupied and rented for that lease term. Always use a lease!
7. Accepting a Personal Check for the Deposit and First Month’s Rent
Once I leased a property for $1,500 per month. The deposit (also $1,500) and the first month’s rent of $1,500 were paid to me with a personal check ($3,000 total). I took the property off the market, the tenants moved in, and I deposited the check. After a few days the $3,000 check bounced! I called the tenants and they said they changed their minds, so they cancelled the check. I had to do a ton of work (locks, putting property back on market, etc.) to get the place rented again. I would have been entitled to keep most if not all of the $3,000 if I had it. The lesson: When you exchange keys for money, ALWAYS demand that it be in cash or certified funds. Apartments do it this way, and so should you.
8. Not Being Strict About Timely Rent Payment
There is a saying that it is better to be strict now than later. When you are going over the lease with the tenant, tell them that you have a “zero-tolerance” policy for late rent payments and that you start eviction proceedings on the 3rd day of the month if rent is not paid (or whatever day your state allows). Have them initial this part in the lease. This way, when they are nearing the end of the month and are thinking of which bill they can short, skip, or delay, they will remember that you are not one of those. If you let your tenant think that they can pay you late, then they will. You should also strictly enforce late fees.
9. Evicting Too Late
Once your tenant is late on rent, serve your eviction notice immediately. They need to know that you don’t play games. Too many landlords try to be “nice” and let the tenants pay late, later, and later. Eventually they are months behind on the rent and the landlord has lost a ton of money. By serving the eviction notice right away, you will either get paid as you should, or you will remove a tenant that was never going to pay you anyway. Your rental property is a business. Treat it as such.
10. Not Keeping Proper Insurance
If you have a mortgage on the property, you will likely be required to have hazard insurance, protecting the property from fire, etc. Make sure your policy also has liability insurance protection, to protect you if the tenant sues you for damages arising from your negligence of some sort. If the policy does not have liability protection, see if you can have your homeowners insurance on your primary residence extend liability protection to your rental property (this is usually very affordable). If not, you should consider buying an umbrella policy or some policy that will protect you in that way. The last thing you need is to get a judgment against you for something that should have been covered by insurance.
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