I’m a strong advocate for steadily buying/accumulating hard assets, be it precious metals, land and investment properties. I’ve been practicing what I preach for several years now; and along the way I’ve learned some very valuable lessons in hard asset investing.
In this article I want to share with you the 5 pitfalls of owning an investment property. Toward the end of the article, you have the opportunity to download my free Ebook on how to avoid these potential problems (I strongly encourage you to get your free copy – it’s loaded with incredibly valuable information).
The 5 Pitfalls of Owning an Investment Property
Time Commitment: Owning an investment property requires you to contribute time and effort to the asset. It needs to be ran like a business. And those inconvenient calls from tenants letting you know the kitchen sink is clogged or the furnace isn’t working are sometimes unavoidable…
Unless you get a property management company to run your rental (which is dumb if you can avoid it), you will have to commit time on an infrequent basis to the investment. Unlike many other hard assets, properties require upkeep – this is their main downfall. How much time you commit will vary, of course. And I’ll show you how to minimize that time commitment in my Ebook The Landlord’s Bible (below).
Tax Planning: Collecting rent from your investment property will create another source of income. This means your tax return just got a little more complicated. While the interest you pay on the mortgage is tax deductible, as are all expenses toward the property, the amount you collect in rent that goes to the principal is not. If you file your own taxes, be prepared for this.
To save money on taxes, many landlords choose to carry significant sized mortgages on their investment properties (the more that goes toward interest and repairs, the less paid in tax).
While owning a single investment property won’t be too hard to keep track of from a tax perspective, multiple investment properties (which should be your goal) can make it tricky. In the end, it requires you to be organized by keeping accurate records.
Finding a reliable emergency contact: Two years ago, while traveling for business, I realized the vital importance of an emergency contact. Not more than 3 hours after landing in Toronto, just minutes before I had to make a presentation to a boardroom of suits, I received a call from my panicked tenant, who sounded like she was hyperventilating, informing me that the kitchen had 3 inches of water on the floor!
I travel a lot for work. Surprisingly, this has been my biggest challenge as a landlord. I manage the investment property in my hometown; and given that I am traveling nearly 3 months of the year, a reliable emergency contact in case something goes wrong is vital (and it has on more than one occasion).
There are a couple ways to skin this cat. First and foremost, every landlord needs to build a strong relationship with a great handyman. Make a deal with him so if in the event you are out of town, and an emergency at the property takes place, he’ll step up and help. Establish a guaranteed fee for him if he receives a call from your tenant – even if he ends up not having to do anything. This will keep him accountable.
The key is that your handyman is an entrepreneur; that way he is more likely to be available in case of an emergency. A handyman with a 9 to 5 can’t up and leave during the day. Emergencies are called ‘emergencies’ for a reason.
The second way to skin this cat comes down to educating and preparing your tenant. Let your tenant know when you are leaving, well in advance, and provide them with a list of contacts in case of an emergency. That list should include two plumbers (in case one is unavailable), your handyman and, if in the winter, the number to the furnace repair company. These are the critical contacts your tenant needs to be able to get in touch with. Additionally, make sure your tenant has your hotel contact info, email and cell number.
In my Ebook The Landlord’s Bible I explain how to streamline your emergency response and decrease the odds of ever having one occur.
Surprise Expenses: Your furnace dies. There goes $5k. Last month this exact scenario happened to me. Things like that are unavoidable as a landlord. Appliances break, but it doesn’t make it any easier to pay for them. In my Ebook below, I explain how to save money on surprise expenses and exactly how to plan for them so they aren’t such a shock to your bank account. There are ways to cover these expenses without having to dip into your savings.
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High-Maintenance Tenants: I’ve said it once and I’ll say it again: Tenants will make or break your success as a landlord.
They are the critical piece in all of this. I would even argue that your tenant selection process is more important than the investment property itself.
If you are unsure how to screen and then select the ideal tenant for your rental property, you have to download my free Ebook below. I go through that process in great detail, including how to select a tenant that will stay in your rental for years – which avoids high turnover (critical!).
Being a landlord, as I’ve said many times before, is one of the best ways to earn passive income and build long-term wealth. However, if you don’t prepare for these potential pitfalls by learning how to select the right property, tenant, appliances and contractors, you run the risk of repeatedly having to deal with these five issues when you least expect it.
The horror stories I hear about landlords running into problems are, for the most part, completely avoidable. Learn how to avoid these potential threats by downloading a complimentary copy of my Ebook, The Landlord’s Bible.