The choice to invest in rental property and become a landlord is a huge one. As with all investments, it comes with a number of risks, needing careful calculation. Mistakes can be extremely costly - from the choice of mortgage provider, the purchase price of a property and even the tenants you choose.
However, many people still decide to become landlords, longing to change their lives, regain control of their finances and set up a stream of passive income through rent. Numerous landlords find that their venture brings them great success, but there are common pitfalls that often cause problems. This article identifies common mistakes and offers suggestions on how they can be avoided.
The first mistake new landlords often make is overestimating the rental income that will be received through an investment property. This issue is often compounded by underestimating the costs of renovation, putting additional pressure on cash flow.
The issue of overestimating rental income can be largely diffused by thorough research. Look around at other rental properties in the location you are purchasing your property. It is a great idea to pose as a tenant and visit available rental properties for insights into what is available in your market and what the landlord is looking for.
Be aware of rentals remaining on the market for a long time as this can indicate that the rental fee is too high. One way to avoid this situation yourself is to set your rental rate a fraction below the average market rate. This will generally ensure you have 100% occupancy and a slightly lower amount of rent every month is better than no rent! Additionally, if you find a great tenant, they are definitely worth holding onto with an attractive rental rate.
A bonus suggestion for this mistake is to market the rental property before any necessary renovation has been completed. There is no need to wait to get the ball rolling, so go ahead and advertise, to allow for plenty of time to complete the screening process. And on that note, let’s move on to mistake number two.
Mistake Two - Failing to Screen Potential Tenants
Once you have purchased your rental property, paid all of the fees, taxes, renovations and so on, it is no surprise that new landlords feel a real sense of urgency to get a tenant in, start bringing in money and begin recouping the costs that have been mounting up.
Placing an advertisement often results in an influx of calls and, using your landlord instincts through the power of the phone, you can have someone moving in by the end of the week. Perfect, right?
Maybe not so much! A bad tenant can cause enormous damage to your investment property and can disrupt your cash flow and even credit rating, affecting your relationship with your mortgage lender, your interest rates and, as a result, your future ability to purchase property.
The only way to avoid this pitfall is to create a robust tenant screening system and choose your tenants carefully. A phone call should be the first in a series of steps towards deciding on the right person to live in your investment property. It is wise to also ensure that the following are completed:
- Written application form
- Credit and criminal checks
- Referrals from past landlords
- Referrals from current employer
The suggestions above should be the bare minimum. Whatever system you decide on should be used for every potential tenant, and records of your process should be filed safely. It does sound like a lot of effort, and it can take a couple of weeks to have everything in place, but it is certainly worth the effort, as it can potentially save you a lot of hassle (not to mention money!) later down the line.
This mistake should never happen, but alas, sometimes new landlords feel that a generic template of a lease agreement, pulled directly from the internet, is adequate to serve as the contract between them and their tenant.
In most cases, this is sufficient as little more than a starting point. The best case scenario is to seek legal advice to complete a lease agreement that suits your exact requirements. Often a template can be tailored to your needs with tweaks that ensure you and your investment are covered against almost any eventuality.
Do your research on local laws that may be specific to your state as well and be sure you work within these guidelines, too.
Mistake Four - Inadequate Planning for Maintenance Costs
The fourth mistake that often catches new landlords off guard is failing to prepare adequately for maintenance costs. Issues can crop up without warning, especially in family homes or properties with pets.
The important thing here is to have a decent insurance policy in place that covers your investment property from unexpected emergencies. This alone is not enough. You should also have a savings account which enables you to keep on top of routine maintenance, saving money in the long term.
You, or your property management company, should routinely visit and inspect your investment property to keep a close eye on the wear and tear of the building and its fittings. When repairs are required, these should be carried out as soon as possible. This will keep your tenants happy and also keep the house in the best possible condition.
It makes sense to get to know your local recommended tradesmen and develop good relationships with those that prove to be trustworthy. This will pay dividends in terms of the price and quality of work completed at your property.
Mistake Five - Delaying the Eviction Process
The fifth mistake that numerous new landlords make is failing to progress with their eviction procedure when tenants fail to comply with the terms of the lease agreement, especially with issues such as continual late payment of rent.
It can feel daunting to forge ahead with legal proceedings against your tenant, especially if you have become emotionally invested in the relationship. But, it is important to remember that being a landlord is a business. The goal is to make money, not to be inconvenienced each month, suffering from stress and paying the price in late payment fees from your mortgage provider.
If you find yourself with a tenant disrespecting the terms of their signed lease agreement, don’t delay in beginning eviction proceedings. In most cases, your action will be enough to show your tenants you mean business, teaching them to pay on time, every time.
In the worst case scenario, you will be forced to go to court and the problem tenant will be removed. Eviction can be a time-consuming and expensive procedure, but allowing your rules to be flouted for months on end is equally costly. It makes sense to get rid of the problem as soon as you can, to enable you to find a good tenant that will make your life as a landlord a breeze - and your rental income will really start to feel passive!
Becoming a landlord is not as simple as just purchasing a property and collecting rent each month. The role requires a number of tasks to be completed, some of which may fall outside your natural strengths. Regardless, it is possible to prepare yourself for success by understanding the common mistakes new landlords often make and taking steps to prevent yourself from succumbing to these pitfalls.
By following the guidance in this article, you should be able to avoid 5 of the most common mistakes made by new landlords:
- Overestimating income (while underestimating costs)
- Failing to screen potential tenants
- Failing to write an adequate lease agreement
- Failing to plan for maintenance to the rental property
- Delaying starting the eviction process
Being prepared for these five scenarios will benefit your journey as a new landlord. Of course, each situation is unique and the challenges will be different for every individual. Inevitably, some imperfect decisions will be made along the way. The key is to prepare for success as much as possible, learn from your mistakes and never give up.
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