So, 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?
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