Ever consider becoming a landlord? It is tempting to many. What could be better than earning money each month while someone else pays your mortgage? Being a landlord can be a dream come true for real estate investors and with some work and expertise your dream can easily become a reality. And while being a landlord can be profitable, it is easy to make a mistake or misstep which could lead to a significant loss of income. Below are seven mistakes that both recent and experienced landlords should try to avoid.
Mistake 1: Over-Leveraging your Rental Properties
Taking out a loan for the purpose of buying rental properties may seem like a great idea. However, you must be careful not to over leverage yourself out of any monthly cash flow. If your mortgage, escrows (taxes/insurance) and repairs are barely covered by rent, you could lose significant money if you have a long vacancy or a tenant damages the property.
Quick Tip: There are many ratios investors use, but I look at the monthly rent versus the purchase price. If you can rent for 1% of the purchase price per month that is usually a good barometer, but you still need to watch expenses. For example, if the purchase price for the rental property is $100,000 you should be able to earn a profit if it rents for close to $1,000/month (easier with multi-family properties).
Mistake 2: Underestimating Costs
When evaluating properties, you must also determine whether the landlord or tenant is responsible for utilities, garbage, repairs, landscaping, etc. I have had several clients purchase a multifamily rental property only to realize afterwards there is one utility bill, which they are responsible for. Also, many “mom and pop” investors tend to underestimate expenses.
Quick Tip: Keep a reserve/emergency fund account. Expect costs to average approximately 30%-40% of rent.
Mistake 3: Using a Generic Rental Agreement
Using a generic lease form you found on the internet or were given from your real estate agent can lead to disaster. Why you ask? Every state has different laws and if your lease is defective, it makes evicting a bad tenant or collecting on a judgment far more difficult… and thus costly to you.
Quick Tip: Consult with an attorney. We have specialized leases that are updated annually and can draft a lease for a small expense.
Mistake 4: Failing to Properly Screen Tenants
Trusting your instincts is not enough. Do not rush into a lease and rent to someone you feel sorry for. Every landlord is going to have a bad tenant at some point; however, there are ways to reduce those odds. Run a credit/background check, verify employment and obtain current and past rental history.
Quick Tip: There are many online companies that can run credit/background checks for a nominal amount. It is money well spent.
Mistake 5: Ignoring your Rental Properties
Although repairs can be expensive, you cannot ignore them. The longer the issue continues, the more it will eventually cost you to fix. Addressing tenant concerns and potential problems with your rental properties quickly and effectively, will save you financially and may prevent any possible law suits. Also, make sure to inspect your rental properties as tenants often “forget” or fail to notify the landlord about a repair issue. Nothing is worse than a simple sink leak, leading to a major bathroom remodel and mold remediation.
Quick Tip: While it may be honorable to respect your tenant’s privacy, you also have a duty to check on your investment. Your lease should have a clause for such inspections with reasonable time periods and notice provisions. Make sure you have a good handyman, property manager or annual repair contract for your rental properties.
Mistake 6: Failing to Serve Tenant Violations/Following the Law
While your heartstrings will tug, falling behind on rent is not an option. Being a landlord is a business, not a charity. If the tenant defaults (monetarily or even non-monetarily), put the tenant on notice. If the default is not cured, serve the tenant quickly with eviction papers. You must send a strong message to your tenant or they will take advantage of you. Make sure any notices sent to the tenants follow the applicable statutes or else the notice will be deemed defective.
Quick Tip: Consult an attorney. While the cost may initially be higher, it is better than sending a defective notice that results in a longer and costlier eviction.
Mistake 7: Ignoring Renters Insurance Policies
All landlords should require their tenants to obtain renters insurance. A typical landlord’s insurance policy covers the structure, injuries or property damage. While this may sound like enough, what happens if the rental property is burglarized or your tenant’s personal property is damaged somehow? This is not covered by landlord insurance, so who is the tenant going to blame or lash out at? I have seen this result in property damage numerous times.
Quick Tip: Requiring renter insurance should be a mandatory clause in any lease agreement and the tenant can obtain it for a very reasonable fee.