Want to Invest In Rental Properties? 3 Big Landlord Mistakes to Avoid
On the surface, becoming a landlord seems like a no-brainer. You can earn passive income and defray the cost of or completely pay your own mortgage and expenses at the same time. But “passive” income generation may be a bit more active than you anticipate if you are going to be a landlord. This is a hands-on job! What do you need to know before you jump into property management?
Knowing what obstacles lay in your path can help you avoid them. Here are three common – and potentially major – mistakes landlords make:
- Underestimating expenses. You know how home remodeling projects always end up costing more than you thought? Well, think of this is a big – big – project. Your mortgage is just the start.
Have you considered taxes and insurance? What about smaller expenditures (that can quickly add up), such as landscaping, upkeep, cleaning, trash, and water? A major misstep that many new landlords make is not putting enough aside for a rainy day. This is a mistake because on that rainy day, it’s guaranteed that your roof will be leaking!
You need enough to cover major repairs (e.g. roofs, foundations, HVAC) and the replacement of bigger ticket items (refrigerators, washers/dryers, stoves, etc.).
Having a tenant move out unexpectedly, a consistent failure to pay rent, or a vacancy can also muck up the works in terms of your incoming and outgoing cash. Always budget for more than you think you need. You’re almost certainly going to need it.
- Not screening your tenants thoroughly. Trusting a friend or acquaintance reference? Or – gasp… worse – your gut? Feeling that someone seems “nice enough” or “reliable” is not good enough. It’s understandable that you want to fill vacancies quickly and get that cash flowing, but choosing the wrong tenant can lead to landlord nightmares.
From constant disagreements to noise to failure to pay to trashed apartments, unsuitable tenants drain your returns. Always, verify prospects’ credit, source of income, and references (at the least, previous and current landlords).
- Not following the letter of the law. Being a landlord means you have to become an amatuer lawyer. Well, maybe not – but you do need to be aware of the legal requirements under which you must operate. Does a month-to-month tenant have 15 days in which to move out, or is it 60? It depends on your state. This is just one example – among many.
How do you avoid legal trouble? Join your local or state landlord/apartment owners’ association, research your local laws thoroughly, speak to an attorney, and do not rely on generic tenant forms.
Another way to avoid the potential pitfalls of being a landlord is to invest in turnkey rental properties. Your partner will handle the property management side, freeing you up to focus on other investments and opportunities.
Ready to be a landlord? Check and double check that you have the know-how to avoid common mistakes.