Real estate is an attractive option for those looking for a sound investment. However, many novice landlords have jumped onto the rental business bandwagon without first considering the responsibilities and potential consequences related to such a venture. If you’ve decided to run a rental business, it’s important to avoid the common mistakes novice landlords often make.
Treating a Rental Business as a Side Project
When you become a landlord, you’re committing to an entirely new profession. If you think of your rental properties as side projects or hobbies, your chances of success and your potential income plummet. Running a rental business is a full-time job; you’ll need to be on hand for any tenants that call with issues, and required to take care of maintenance and repair problems in a timely manner. Unless you use a property manager (which comes with its fair share of disadvantages), be prepared to devote a significant amount of time to this venture, especially if you hope to expand your business and purchase new properties down the road.
Being Lax with Late Payments
While it’s understandable to develop a sense of sympathy for tenants that are late on rent (life happens, after all), you need to keep in mind that your livelihood depends on their timeliness. So long as you include provisions about paying the lease on time, you’re within your right to either charger late fees, and in more severe cases, evict. Not charging late fees is a mistake that many landlords, novice and experienced, make with their tenants. Allowing this leeway gives tenants the green light to pay late every time—give them an inch, they’ll take a mile.
Forgoing Credit Checks
If you allow a tenant to move in without thoroughly checking their credit score, criminal history, and past evictions, you’re setting yourself up for a world of hurt. Always be sure to put prospective renters through rigorous checks. The more thorough you are, the better chance you have of weeding out any tenants that could be potential problems down the road. The single greatest cause of landlord failure is terrible tenants, so take the time to place someone in your property.
Overcharging Rent
When you begin estimating rent rates, make sure you’re staying within the realm of reason. Scaring off what would have been wonderful tenants can leave your space vacant for weeks or even months at a time—meaning negative income thank to ongoing costs. Check out Rentometer.com to determine whether your rent is realistic for the area and competitive with comparable rental properties.
Underestimating Cost
Buying the property in question is only the beginning of your financial responsibilities. You’ll find that maintenance and repairs can quickly drain your savings, so it’s important to have plenty of capital to draw from before purchasing your first property. Keep in mind that tenants put a lot of wear and tear on properties, and don’t always maintain it as well as you’d expect; from roofing work to flooring replacement, you’ll have plenty of unforeseen expenses come up. If you don’t have personal money to use, you’ve likely approached lenders. Whether you use a traditional bank loan, an angel investor, or a hard money loan, you’ll need to make sure you have enough to keep your property afloat, even during times of vacancy. The best bet is to use multiple forms of financing; the combination of capital sources will leave you prepared to expand.
Relying on Property Managers
For your first rental property, it may be a good idea to forgo the use of a property management company. Letting a third party take control of your property means you lose out on a bevy of learning opportunities. You’ll become dependent on property managers, and this doesn’t bode well for expansion. If you do choose to hire a property manager, take references into account and shop around. You’ll be handing over a significant chunk of your rental income to this company or individual, so do your research before hiring.
Becoming a landlord can be a rewarding endeavor, but it also comes with its fair share of risks.
