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5 Common Rental Real Estate Mistakes Landlords Will Make

rental real estate mistakesSo, you are ready to take the rental real estate plunge and become a landlord. Awesome! I hope that you have come to that decision by desire (you really want to do this) and not by necessity (you were forced into it because your house wouldn’t sell). One of those scenarios (hint: the first one) generally works out better than the other.

My wife and I have been renting properties for some time now and our landlord experience has been positive. I believe our success comes from a desire to run a quality business, as we never considered this to be a whimsical adventure. We spent over a year studying the idea to make sure rental real estate was right for us because we knew it has its darker side. I believe we set ourselves up for success as landlords by doing that because we went into it with our eyes wide open.

Rental Real Estate Mistakes Landlords Should Avoid

Even with all our preparation we made some mistakes with our rental real estate. Here are five big ones I want to help you avoid.

1. Paying too much for a property

The time to make big money in rental real estate is at the buy. This happens by purchasing homes at deep discounts, usually from people who are under pressure to sell. There are desperate people out there, extremely eager to avoid a foreclosure, wrap up a divorce agreement, or close an estate that has been open for a year because a house won’t sell. While unfortunate for them, these situations are prime buying opportunities for the real estate investor to acquire a cheap (in price, not quality) property.

Instead what happens to most newbie real estate investors (like us on our first purchase) is that we get excited about the idea of owning property and engage in the buying process with too eager an attitude. We see low interest rates and think we have to capitalize on that NOW. Or we fall in love with one particular property and that emotion clogs our brain from realizing it might be priced too high. We think it’s the perfect place and overpay to get it.

All we know is that we want to get started no matter how expensive that first house is.

My advice would be to slow down. You should wait and wait some more. There will always be properties available – you don’t have to buy one tomorrow. You won’t miss out on interest rates – they don’t move that quickly. This process requires patience and a time commitment to look at dozens of properties. Forcing yourself to do this will remove some of the emotion from the buying process and give you comparisons to make a more informed decision.

This sounds cold-blooded but it’s a motto I’ve come to appreciate in rental real estate, “If you can’t steal it, you shouldn’t buy it.”

2. Carrying too high a mortgage payment

This is how most people process the mortgage-to-rent payment scenario:

“I can put 10% down and take out a loan for the rest. My mortgage payments will be $950 per month and I can rent the property for $1,200. That’s a monthly cash flow of $250. Times 12 months in a year and I’ll bring in an extra $3,000 in income. Sweet deal!”

Thinking like this is really naïve and tells me you haven’t really thought the business through.

In my area, a house that would bring in $1,200 a month in rent probably would have an annual property tax of near $1,000. So factor in that expense cutting into your profit (especially if you haven’t put that money into escrow). You will also need to pay for property insurance to protect your investment and account for there being repairs during the year. I’ve never gone a year without needing to fix something.

As you can see those three things eat into that $3,000 to the point you might be clearing next to nothing. Then what if:

There is a BIG repair. (Don’t think it won’t happen. I just put in a new $5,000 well at one of our properties this past year.)

Your tenant gets behind with their payments and then skips out on the lease. (Don’t think it won’t happen. I’ve had to evict someone before.)

The property sits vacant for some reason. (Don’t think it won’t happen. I had one sit for three months to do repairs and upgrades.)

There are three answers to the mortgage dilemma as I see it. You can either:

1. Create a bigger buffer between the mortgage payment and the rental amount,

2. Save a great deal of cash to set in reserve (as a business emergency fund) before buying the property with a mortgage, or

3. Purchase the property with cash.

Of those answers, #3 is the safest route (then set up your emergency fund). Keep in mind we are trying to get a steal of a property so buying with cash may not be as far fetched as it sounds.

3. Failure to think through location

Just like I’ve laid out a plan for this blog, so I also have one for our rental business. The biggest part of our plan centers around the real estate mantra you’ve heard so often – “It’s all about location, location and location.” I’m just not buying houses anywhere.

Right now, all of our homes are located in one of the finest school districts in our area. This was intentional. Why? Because people crave getting into this district and will rent houses to do so. That facilitates our properties getting snapped up quickly once they hit the market.

I’m pretty picky about location and view this as a good thing, in that it slows me down from making a hasty purchase (see #1 mistake). Personally, I would never buy a property:

in areas with a high crime rate (self-explanatory),

near a landfill (unattractive smell),

near an airport (noise),

in a trashy neighborhood (clutter is never attractive to a potential renter),

the house next door (or several down) where I live (too close for a landlord/tenant relationship),

one a long distance from where I live (too difficult to keep tabs on, unless overseen by a property management company),

sitting close to a heavily trafficked, major highway (potential traffic dangers, could affect resell value).

Those are my tastes and are by no means set in stone. Whatever your preferences, it’s still vital to develop a plan for what you are looking for in a property location. Again, this is all about you making a wise decision and one that’s comfortable for you.

4. Refusing to quickly respond to tenants needs

This is customer service 101. I’ve never understood why landlords don’t respond promptly to tenants when there is a need at the property. I know we all have busy lives but if you can’t find time to make a phone call, send a text or answer an email within 24 hours of receiving a request, you probably shouldn’t be in this business.

Think about your reaction when a boss, the repairman or even friends don’t return your phone calls. Do you start to wonder why? I do.

My first line of thinking doesn’t get me upset – probably didn’t get the message, something came up that they couldn’t call or perhaps they just forgot. Those reasons don’t tick me off.

After they don’t respond for a while though (and maybe after another phone call from me), I start to wonder. Are they too busy to answer my need? Did I do something to upset them? Are they ignoring me? Those questions start me down the road towards frustration.

You simply don’t want frustration or anger from your tenants because you are ignoring them. The goal of every landlord should be to keep each tenant for as long as possible. Responding promptly lets them know they are valuable and cared for. That makes for happy tenants that could turn into life long renters.

5. Poorly handling repairs

I find it interesting that we spend a great deal of money on the purchase of a property and then fret about spending money on repairs – as if they weren’t supposed to ever happen. Repairs are a part of owning property. The sooner you get over that the better.

I think landlords fail with repairs in three ways:

1. Failure to budget for them. This is where the mortgage buffer (see #2 mistake) and a business emergency fund come into play. The E-fund should have enough in it to cover a major repair. The most expensive one I’ve encountered was the aforementioned new well we drilled. Other big repair items could include a new roof, replacing an appliance, plumbing repairs, fixing termite damage, or heating and air issues. These are potential big-ticket items but would be covered with an E-fund holding at least $10,000.

2. Skimping on repairs. Do it right the first time. Don’t try to go the $3 route when $10 would surely fix it. You are nickel-and-diming yourself here and probably creating more work than is necessary.

3. Doing all the work yourself. Know your limitations as a repairman and hire qualified personnel to fix problems where your knowledge and skill is lacking.

Also, have a good understanding of your life and the time constraints the business puts on it. Perhaps time would be better spent with family than running off to handle every repair issue. This is also when hiring a professional may be a wise choice.

Put Thought Into the Rental Real Estate Business

You can avoid these common mistakes with wise planning and thoughtful consideration of how you will run your rental real estate business. Take the time to process how you will handle these situations before you take the plunge. Doing so will greatly enhance your chances for success.

Questions: What other rental real estate mistakes do you think landlords make? Where would you never purchase a house? Are you doing all repair work or hiring professionals for the jobs?

Image at FreeDigitalPhotos.net

Next Post: Fire Brings Out the Best in You

Prior Post: Revisiting Why I’m Here at the 200th Post: The Luke1428 Value Proposition

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Comments

  1. Hii!
    Great Post.
    All points are helpful.It is absolutely true that location plays an important role whenever we invest in any rental property.Real estate investment business is such that your smartness can reward you with big rewards while a small mistake can make you suffer a big loss. So, by keeping these points in mind we can do a successful business.

    Thanks, for sharing this valuable information with us.

  2. VERY very sound advice. I think the underlying theme is to really wait for something that fits every single quality you are looking for. Thanks for sharing!

  3. If rental prices allow, you can live in your dream home now and not have to compromise on location or features, and you don’t have to worry about taking on the long-term commitment of a big mortgage.
    rental mortgage recently posted…Nothing is as constant as changeMy Profile

  4. Here’s my personal experience that I am going to share: Some landlords assume that their property will always be rented.
    If as a landlord, you are only counting on your rental income to cover your expenses then you need to keep in mind that sometimes your property might be vacant and you need to be prepared for it.

  5. Hello Brian!
    Well Written Article!
    I love how much thought you have put into this post!
    It’s true that investing in real estate is a great way to build passive income and increase that cash flow. But you need to make a decision wisely .Thanks for sharing “5 common rental real estate mistakes you will make ”

    Really helpful for those who are new to real estate market !

    Thanks Again! Great Work Buddy !

    • “…make a decision wisely.” Agreed Vern. Too many people make an emotional decision that is not based in reality. Then they get into the business and realize they should have thought it through more and prepared. Anyone wanting to invest in rental real estate should take their time. We prepared for almost 3 years before buying our first property.
      Brian recently posted…12 Short Bible Verses that Pack a Powerful MessageMy Profile

  6. Hey..!!
    As a real estate agent I can associate this post with my day to day activities. Real estate investment business is such that your smartness can reward you with big rewards while a small mistake can make you suffer huge loss.
    So you have mentioned really helpful points buddy. I am glad that I came across such a helpful post. Nice information.
    Thumbs up buddy..!!!!
    Herman recently posted…Villas for Sale Hua HinMy Profile

  7. I am thinking to take the rental real estate plunge and want to be a landlord. I have a friend who is a luxury real estate agent. I got some important suggestions from him. But I am also searching more tips regarding this issue in online. Because I don’t want to make any mistake. I believe this article will help me more. Thnaks for this useful post.

  8. I can really appreciate these as a fellow real estate investor! Great tips – I just featured this in my latest roundup 🙂

  9. TacklingOurDebt says:

    Excellent tips Brian!

    Location is very important. Something that is family friendly and is known as a safe neighborhood will rent well to young families that can’t afford to buy yet. Having that large buffer as we chatted about the other day is so important to survive, and customer service is extremely important. We are currently renting in a nice quiet family friendly neighborhood and we love it. At first the management company gave us a bit of a hard time when we had requests but now they are quick to help us out. And this place has cost the owners a few bucks while we have been here. A new washer & dryer, new dishwasher, furnace repairs, and a few other things, but that is all because this house is about 17 years old and most of those things were original and well used.

    • As a landlord, you create so much good will with your tenant when you connect with them and offer great customer service. It’s not that hard to do either…just think about how you would want to be treated if you were in that situation and then act accordingly.

  10. Good stuff Brian. As someone without any real estate experience, I really appreciate how practical and down-to-earth your thoughts are. No pie-in-the-sky “get rich with real estate!” advertisements. It’s a business with pros and cons and it really seems like you’ve thought through them all really well.

  11. Charles@Gettingarichlife says:

    Brian,
    Real estate is my favorite investment. I agree with you what I don’t understand is how landlords don’t respond quickly to repairs. It’s a big investment, you should maintain it. How many rentals do you manage?

  12. Great tips, Brian! Rental real estate can definitely be a profitable but as you pointed out some people jump too soon. So many people assume because they charge more than the mortgage everything will be fine. But there is property tax, repairs and vacancy to think about as well. You have to make sure it’s something you really want to do. And you’re very smart to buy in a neighborhood with a great school district. When we bought our home that was something we definitely wanted to be sure our future kids had a good school attend.

    • You make a good point…you simply can’t just charge more. There are other properties people will move into if your rent is too high for the type of property. Have to base rent on comparable houses/apartments just not on what you want/need.

  13. Monasez (@Monasez) says:

    People should definitely spend the extra money to do it right the first time. Right now we’re having issues in my house because we paid a handy man to fix our bathroom for cheap and they didn’t do it right. Now we got to spend more money to get it fixed the right way.

  14. Alexa Mason says:

    I am so ready to invest in rental properties. I am constantly looking for foreclosures in good locations. When I was married my husband and I flipped a house and it was the funnest thing ever. I’ve had my eye on one foreclosure in a good location but I waited too long to view it. The price dropped last week and someone instantly snatched it up.

    • From what I know about your situation it seems like a good fit – as long as you can make the money work. One thing that I do enjoy is the passive nature of this business. It does require work but 75% of the time you are just sitting back and collecting rent checks. At least that’s been my experience.

  15. I’m not sure I’ll ever be to the point of making money this way, but I think this sound like great, solid advice. I like how you and your wife spent a year really researching the process. I think too many people jump in without weighing everything first.

  16. Great suggestions and overview, Brian! I haven’t been a landlord that long, but I agree that you need to know your limitations. I paid between $500 – $1,000 for work done between our last renter moving out and our new one moving in. It was well worth it and I would definitely have done it again. Yes, I did do some smaller things DIY, but the big things you should leave up to the professionals.

    • Thanks DC! There are some things I could work on myself and feel confident I would do a good job. One advantage of hiring a professional is you have recourse in case something about the repair doesn’t go according to plan. If a plumber repairs a leaky faucet and it begins to leak again, you probably could get the plumber back out to do the work for free because they didn’t fix it in the first place. If I do the initial work and the same issue occurs, I have no one to blame but myself. And I’ll probably end up calling a plumber at that point anyway.

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  7. […] Luke1428: Brian’s articles on how to navigate the world of rental properties are always down-to-earth and practical. This is a good one talking about common mistakes to avoid. I particularly like the advice to BE PATIENT with your purchase. This is a long-term decision and there’s no need to make a decision tomorrow. […]

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