Owning a rental property can be a great way to earn passive income and build wealth over time, but being a landlord isn't necessarily easy. Too many first timers find this out the hard way.
With that in mind, here's a list of seven of the most common mistakes new landlords make and how you can avoid making them as you get started with rental property investing. By learning these ahead of time, you can position yourself to maximize your income and minimize unnecessary aggravation.
1. Not screening tenants
Far too many new landlords simply place an ad for their rental properties and lease them to the first person who comes along. It's easier to be selective in a housing shortage like we're facing now, but it's still quite common for new landlords to ignore basic screening tools.
At a minimum, it's a smart idea to run a credit check on potential tenants to see if they have a habit of paying bills on time and to check references -- employers and former landlords, not friends. If something doesn't check out, don't rent to that applicant. It's better to let your property sit vacant for another week or two than to get the wrong tenant in place.
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2. Underestimating repair and maintenance expenses
When figuring out your budget, it's a common mistake to underestimate how much you'll need to spend on repairs and maintenance on your property. In fact, some new landlords fail to budget for these at all.
There's no set-in-stone rule, and by definition, repair costs can be unpredictable. But a good rule of thumb is to set aside at least 10% of the rent each month to help plan for these expenses -- and more if the property is on the older side. If you don't end up needing it all, great. But if you do, you'll be glad you planned ahead.
3. Not putting everything in writing
For one thing, all landlords should use an appropriate lease form for the state in which the property is located. Don't rely on handshake agreements, even if you're simply renting a room in your house or if your property is a duplex where you live in the other half. A legal lease agreement provides you with valuable protection in the event things don't go well with your tenant.
It's also important to put property-specific policies in your lease agreement. Just to name a few examples, this might include a pet policy, noise restrictions, or parking rules. If your tenant ever sends you an email or text about the property, make sure you save it in case you need it in the future.
4. Failing to budget for vacancies
One important but often overlooked concept new landlords should keep in mind is that your property will not be occupied all the time. At some point, it's going to be vacant.
Generally speaking, it's a good idea to anticipate your properties being vacant for a month out of every year. To avoid disruptions in cash flow, it's wise to set aside a portion (say, 10%) of your rental income specifically for this purpose.
5. Not inspecting a property
Check the legalities of visiting your tenant-occupied property before you just show up, but it's a good idea to check in on the condition of your property every so often. As a personal example, I had a gutter fall off of one of my rental properties, and the tenants didn't report it. It's very common for issues to go unreported -- overgrown landscaping, slow roof leaks, and dripping faucets are just a few examples of minor problems that can turn into major (costly) issues if they aren't discovered.
6. Being too nice to tenants
Obviously, it's a good idea to maintain a cordial relationship with your tenants. But there's a big difference between being a good landlord and being a pushover.
For example, if your lease agreement says that a late fee will be assessed after the 5th of the month for unpaid rent, enforce it. If your lease says no pets, and you notice the tenants have a cat living there, take action. And if you have problems with a tenant and need to evict them, start the procedures as soon as possible. (Believe me, it can take a while.)
7. Thinking property management is too expensive
Many first-time landlords choose to self-manage their properties, simply because they want to maximize income. To be clear, self-management can be a smart way to go for people who have the time and desire to take a hands-on approach to their real estate investing, but it isn't for everyone.
If you don't want to find and screen tenants, periodically inspect your property, deal with problem tenants, coordinate repairs and maintenance, and deal with other property issues, a property manager can be well worth the cost. The typical property manager will take 10% of the rent your property brings in, but it's important to keep in mind that your time is valuable. A good property manager's fee can be well justified.
Some of these mistakes can be costly
You aren't likely to get everything right as a first-time landlord. Just like any other new business venture, no matter how much you've done your homework, there's going to be a bit of a learning curve when you start investing in real estate. However, by knowing the most common (and costly) mistakes to avoid, you can put yourself in a good position to avoid unnecessary losses and expenses as you figure things out.
