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 new real estate investors, and with some work and expertise, can become reality. Below are our top five rookie landlord mistakes, and by avoiding these you will be on your way towards a successful career in real estate.
New Landlord Mistake 1: Over-Leveraged, Under-Capitalized
Borrowing as much money as possible when buying or refinancing rental properties may seem like a great idea, but it is all too easy to leverage yourself out of your monthly cash flow. This means you will be in the red as soon as you have a vacancy, or unexpected property repairs, or unpaid rent, or a lawsuit, or a bed bug infestation occurs, or any of the limitless landlord problems that arise. By keeping predictable monthly costs low, and a healthy cash cushion on hand for unexpected expenses, landlords will profit most months and will be prepared for the lean months. At the end of the year, you should show a profit if you keep your predictable monthly expenses (mortgage, taxes, and insurance) at no more than 50% of your month rent. (Check out our incredibly smart rental property ROI calculator, integrated with Zillow, to review the numbers before purchasing.)
New Landlord Mistake 2: Using a Generic Rental Agreement
Using a generic rental agreement can leave landlords open to lawsuits, unenforceable leases and worse. Many states have special language that must be included within the rental agreement, or state-specific disclosures that must be attached to the lease, and there are even federal lead paint pamphlets that often must be included. Additionally, states place limits on how much a landlord may charge for security deposits, how many days late the rent must be before a late fee can be charged, and countless other restrictions that landlords must know. We suggest either hiring a landlord-tenant attorney or using a credible online rental forms service that helps you through the process of creating a rental agreement for your state.
New Landlord Mistake 3: Failing to Properly Screen Tenants
When it comes to locating tenants, there can be a lot of bad apples out there, particularly when screening for lower-income rental properties. People tend to be fundamentally responsible or fundamentally irresponsible with money; in the mortgage industry they say “an applicant’s income tells whether they can pay, but their credit history shows whether they will pay.” Remember to verify employment, income, tenant credit history, criminal background, and obtain current and past rental history.
New Landlord Mistake 4: Ignoring your Rental Properties
The roof is leaking, the washer is not working, and there are ants in my apartment… easy to procrastinate but harder to ignore long term. Addressing tenant concerns and potential problems with your rental properties quickly and effectively, will save you financially and may prevent any possible law suits. Send a handyman you trust out to the property to take a look, and more often than not, the tenant was merely overreacting… but you still have to check.
New Landlord Mistake 5: Failing to Serve Tenant Violations
While your heartstrings will tug, falling behind on rent is not an option. Patience may be a virtue but real estate investing is a business, and needs to be run like clockwork in order to succeed. Serve the tenants quickly when their rent is not paid, and it will send a strong message.
