7 Landlord Mistakes You Don’t Want to Make
A good investor does not purchase a property without a concise business plan for that property. Investors know how long they plan to hold onto the property. They know what the market rate is today and what it will be 5 years from now. They also take into account all other business expenses including evictions, maintenance, salaries, and more. Bottom line, they know about how much money they are going to have in the bank when they sell the property 10 years from now. If you haven’t done your research and set up the necessary tools for success, you’re not ready to start investing.
2. No Backup Funds
If you don’t have a business plan, you also likely don’t have enough backup funds. While real estate investing has its rewards, many investors do not realize the extent to which there is cash flow on the property until they’ve made the investment. When investors hear “cash flow” some are only thinking in one direction; into their pockets. In reality, a little bit of inflow money is accruing month over month and the rest immediately becomes outflow paying the mortgage, maintenance expenses, etc. You may have taken some of this into account. But what about emergencies? What about an eviction that gets dragged on? What about property damage that caused by the tenant that is greater than the security deposit? Will you ever see those expenses paid back? In the long term your investment property can be a revenue source. But there may be occasions when you need cash in the immediate. This is why you need a backup fund.
3. Not Properly Screening Tenants
Not screening prospective tenants is a significant risk to your investment and to the rental community that you manage. There are plenty of moral reasons that you should be screening the people that you rent to, but right now we are going to focus strictly on the costs. If a tenant commits a crime on your property, you can be held liable and be sued. If a tenant pays rent late consistently, this is potentially a cost to you for not being able to pay your own expenses on time. If a tenant is reported by previous landlords to have damaged their property, he/she is more likely to damage yours. All of these risks can be significantly reduced through a tenant screening service as it can inform you on rental, criminal, credit, employment history, and so on. It’s a lot cheaper to screen a tenant than to evict.
4. Not Addressing Unit Problems Right Away
A small problem can easily grow into a big problem if not addressed early enough. Having a good and responsive maintenance team will make tenants want to stay at your property longer. Also if you are doing your due diligence during make readies, you can catch problems before they spring up on a resident. Major maintenance issues are more easily remedied when there is nobody living inside of the unit. A major plumbing problem that hits in the middle of the night is not only inconvenient for all, but more costly because you’re in a hurry.
5. Leniency With non/late Paying Tenants
In a previous article, I talked about how it’s very difficult for landlords and tenants to be “friends” without causing problems in the business relationship. This doesn’t mean you can’t be professional. It’s even ok to have some small talk if it’s to build familiarity with your tenant, but you should never feel guilty about expecting a rent payment on time and in full. As a landlord, you’re running a business. If a tenant is not able to regularly pay rent each month, then they really aren’t fit to be living at your property.
6. Overcharging or Undercharging Rent
Some landlords don’t consider this to be a significant issue, but it can be in both instances. If you are significantly overcharging rent, then there’s a good chance that you will have a higher than desired vacancy rate. This can actually reduce your rental income as a result. On the other hand, if you charge too little for rent, your property may be completely filled, but you still are not making the most money that you can be.
A big mistake a landlord can make is not with new tenants, but with older ones. Some landlords are afraid of raising the rental rate on older tenants because they don’t want it to become another vacancy that they have to fill. However, in many case the older tenant’s present rent is well below the average local market rate. A landlord should always charge rent precisely what it is worth.
If you raise an old tenant’s rent close to the market rate, it’s still more of a cost for the tenant to move because the other rents are similar to yours. If the tenant does decide to move, it shouldn’t be very hard to fill the vacancy with someone who is willing to pay that rent and then your rental income will be what it should be.
7. Returning the Security Deposit Too Soon
Has every expense been paid off yet? Have you done a walk-through and made sure there isn’t any damage? How about the utility bills? Even though utility is the tenant’s responsibility a tenant doesn’t always stick around exactly as long as the lease. Some of those remaining utility costs can be pushed on to you at the very end! Make sure you have all of the tenant’s debts and expenses squared away before you give the tenant back their security deposit.