Making the jump from general stock investing to real estate stocks is straightforward. You need to learn some new lingo and understand that the focus is on income more than growth.
Making the jump from stock investing to full-blown rental property investing is far more involved. First-time landlords are often unsuccessful because they treat rental property investing as a hobby. Let's go over the main mistakes that can happen because of this.
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1. Being unprofessional
The most important thing to do when being a landlord is to be professional. Treat your rental property like a business because it is one. You're selling a service and need to follow through with the commitments that you make.
That means putting all agreements on paper, setting expectations for the tenant and yourself and sticking to them. As much as you can, take emotion out of decisions. If you're reliable and consistent, most of the time, your tenants will be too.
If you treat your rental properties as a hobby, bad tenants will figure this out and take advantage of you. Handshake agreements won't matter. Rent will always be late. Something will always need to be fixed immediately. And when they move out, you'll likely find a place that hasn't been taken care of and requires far more than the security deposit to be made rentable again.
2. Not complying with the government
Many localities require you to get a license to rent a property. Some have specific zoning laws you need to follow. Some have safety standards for the property. And of course, no matter where the property is, there will be several layers of taxation, such as income tax on the net income from the property and property tax.
Any benefit, time- or moneywise, that you get from not complying with the government goes out the window the second there's an issue with a tenant. Remember, it's better to treat your property like a business and take care of all government requirements in a timely manner.
3. Not having reserves
Maintaining a house is expensive. In one year, my wife and I had to replace two air conditioning units, a washing machine, and a garage door (and repair another one, which is somehow more expensive), as well as clean the smoke smell out of a house. And that was with two rental properties. The more you have, the more potential problems there will be.
We were lucky to not have vacancy that year and that we had planned ahead and maintained a healthy amount of reserves. We didn't need to take on any debt, and that perfect storm year set us up for several years with no big repair/maintenance expenses.
If you don't have reserves or if you're hit with several months of vacancy, you could be putting your business at risk. One of the first things you learn in stock analysis is to target companies with strong balance sheets. Your rental business needs to maintain reserves to keep its balance sheet strong.
4. Not screening tenants
Most bad potential tenants can be screened out with a background check, credit check, and a conversation. A bad credit report doesn't mean you should immediately decline a tenant. And in some areas, you won't find tenants with good credit reports.
The key is to follow up with the tenant's references when there is a bad credit report and focus on tenants that take responsibility for the bad credit over tenants who blame all of their problems on someone else.
Set policies for screening tenants, and stick to them. This is especially helpful if you're having a hard time declining a tenant -- you can just blame the business's policy.
Declining tenants is awkward. But it's worth five minutes of awkwardness to avoid 12 months of problems with a tenant.
5. Not keeping good books
Save your receipts. Track your miles. Keep depreciation schedules. If you don't keep good books, you won't have an accurate picture of the success of the rental. And you might be paying too much in taxes.
If you do good accounting, you can have a smart response ready for any unexpected offers to purchase your properties. Sometimes you actually do get an offer that is too good to refuse. You can then put that capital to better use. If your accounting is bad, you could be sitting on a money pit for years without realizing it. Even worse, you could be losing money while paying taxes on phantom income.
Treat it like a business
Each of the mistakes that we've discussed come down to that same general principle: Create policies and procedures for each part of the business and stick to them. Be professional, comply with the government, keep a strong balance sheet, screen tenants, and know your accounting, and you'll probably be successful with real estate investing.
