Investment properties are simple to run when you’ve done your homework or have experience – it’s not rocket science and being a landlord is one of the best ways to generate passive income. However, rental properties can be disastrous for haphazard first-time landlords. In light of that, and to help guide you along the landlord journey of building your real estate portfolio, I want to share with you the 5 most common mistakes landlords make so you can avoid them.
The 5 Biggest Mistakes Landlords Make
Poor tenant selection
This is by far the most common, and costly, mistake made by inexperienced landlords. You need to be able to read people, follow up with references and establish ground rules for your property from the get go. This is a business relationship, so stern but friendly is the way to approach it. Click here to read my A to Z blog on how to find the perfect tenant for your rental property. Also, make sure to check up on the property regularly. A walk through every 60-90 days is highly recommended. Tell your tenant you’re simply doing it to monitor the place so to correct any potential fixes before they become a problem. That way you don’t come off as an overbearing landlord.
Don’t know tradespeople
Here is one guarantee I can make to all future landlords: things in your rental property will break, and you will have to get them fixed – quickly. So, you need to build relationships with tradespeople – most importantly a plumber, handyman and electrician. However, you want to make sure you’re not paying full price because these people (particularly electricians and plumbers) aren’t cheap. Here’s what has worked for me:
I have apprentices who I can call in case of an emergency, and also full journeymen that cut me an ‘after hours’ rate if it’s not an emergency and they can fix the problem after their shift, or on a weekend. This can literally save you thousands of dollars a year if you’re a landlord with several properties. So build relationships with at least one handyman, two plumbers and two electricians.
If you’re a property investor, as all landlords should consider themselves, there must be a monetary ‘investment’ made by you in the rental property. Leveraging the value of the entire property is dumb ($0 down), yet so many first-time landlords do it; borrow a little from the credit line, their parents, the personal home-equity line and somehow they miraculously put together a phony down payment so the bank approves the mortgage. This is insanely risky as there is no buffer in place for a rise in rates or a drop in property value. And it will break the cardinal rule of investing in a rental property: must cash flow.
As a real estate investor, you should be putting down 20% or more on rental properties.
Didn’t calculate upkeep costs before purchasing
Properties need to be maintained in order to attract good tenants; and in bad rental markets especially, investment properties need to be held to a higher standard than the competition. In light of that, you should be incorporating 10% of total rent collected to an ‘upkeep account’. Use that money to pay for a new hot water tank, clean the carpets between tenants (although I recommend removing carpet from your rental entirely), painting, new appliances etc. You will have maintenance expenses on every rental property, best to be financially prepared in advance.
Didn’t get lease agreement in writing
It shocks me how many landlords don’t have formal lease agreements with tenants. This is insanity at its finest. One thing goes wrong, and the landlord is screwed without a lease agreement in place. That agreement should clearly state the rules of the property, in addition to the duration and cost of the rental. We never want to deal with a tenant dispute, but be prepared… all you’ll have to fall back on is your lease agreement.
Most cities are bias, favoring the tenant. Landlords can only rely on what’s in writing. Also, keep notes of every ‘incident’ at the property. In case you need to evict a tenant, these notes will be important.
Being a landlord is rewarding. You build upon your net worth (provided you buy the right investment property – click here for help with that) and provide a basic need for other members of society: housing. But so many inexperienced landlords jump into the market without doing the necessary due diligence. Heed the risks of these five common mistakes made by landlords, and avoid them. By mitigating these risks and learning to pick the right investment properties and tenants, you’re going to have a very successful career as a landlord, capable of withstanding any housing market volatility.
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