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3 Simple Landlord Mistakes Costing You Big Money

by Brandon Turner on January 31, 2014 · 22 comments

  
Landlord Mistakes Lose Money

“There’s a hole in the bucket, dear Liza, dear Liza,
There’s a hole in the bucket, dear Liza, a hole.”
- Traditional German Children’s Song

No one likes to lose money.

Whether at the poker table, the supermarket, or investing in real estate – it just sucks.

However, if you are a landlord you are probably losing real money every single month and you don’t even know it. Or maybe you do know it and are just ignoring it, hoping no one reminds you (sorry!)

So today I’m going to share the top three ways landlords are throwing money away – and offer some tips on how you can reverse the problem.

1.)  Not Raising Rent

You justify it in your head, saying “if I raise the rent, they might move and I’ll lose more money!”

However, that’s probably a lie. Come on… admit it.

Most likely, if you have a tenant who has lived in your property for more than a year, they are probably getting a good deal. It’s not our fault inflation keeps ticking along and prices are going up. However, it is our fault if you don’t keep up.

Recently, I decided to raise rent on about 30 of my units, about $15 per month each.  Want to know what happened?

Nothing… except an extra $450 per month.

No one moved, no one even called to complain.

Why?

Because I was only keeping pace with what was competitive in my area. Sure, the tenants may have grumbled a bit when they received the letter, but if they started shopping around, they’d quickly find out they were going to be paying the same as they would elsewhere… but at a nicer property.

Chances are, a tenant is not going to move over $15 or $20, but keeping up with inflation and rising expenses is an important way to make sure you aren’t throwing away money each month.

For tips on raising rent, don’t miss “12 Easy Tips to Reduce Your Vacancy Rates and Find Great Tenants

2.) Not Charging Fees

“But my grandma was sick!”

“But my dog had to go to the vet!”

“But it was Christmas and my kids needed gifts!” 

I’ve heard all the reasons in the world for why the rent is late, and I’m sure you have also. However, I still issue a late fee every time.

Heartless, I know.

However, once a tenant pays late one time and is hit with the fee, they seldom ever pay late again. It hurts to lose money, especially for those on a fixed or limited income – which most tenants are. Therefore, once they see the threat is real, priorities start to change and the rent starts to come in.

Now, this tip is even more powerful than it might appear at first… and here’s why.

When you hold to strict standards and policies (like enforcing late fees), it will prevent the tenant from being their own worst enemy. Let me explain what I mean.

A tenant is struggling to pay rent. Her rent is $850 per month, and month after month she is late. It’s due on the 1st, but you’ll take it on the 5th, 7th, 9th. Each month you call several times and eventually getting the money, usually on their next pay day.  You are stressed out, the tenant is stressed out, and no one is happy. Each month, the rent seems to be a little later. One month the tenant tells you she is waiting for her next pay check, so you say okay.  The middle of the month comes, and she still doesn’t pay. She clams up and stop accepting calls or answering their door. The simple fact is … she has given up. She is overwhelmed and knows that she won’t catch up.  You wait a couple weeks, and still nothing. Finally, you have to evict… 

How can you prevent this problem from happening?

Sometimes … you can’t. Tenants run into  financial problems and you may be the one on the end of the hook for it.

However, YOU can change the way the situation turns out.

Had you issued a late notice and fee the day it was late, along with a three-day notice to pay or quit (or whatever process your state has for late rent) you would have done one of two things:

1.) Trained her to pay on time
2.) Got rid of her quickly. (either by eviction right away or she would have simply moved.)

However, you allowed her own irresponsibility to get the better of both of you, causing a lot more drama.

You thought you were helping the tenant… but like the rich parent who spoils their bratty child, you raised a monster that cost you several months of lost rent, eviction costs, and more.

For more information on dealing with late tenants, check out How to Deal with Delinquent Tenants.

3.) Slacking on Turnover

Do you know what the largest expense, outside the mortgage, for a typical landlord is?

It’s probably not maintenance, taxes, or evictions.

It’s vacancies –  (empty properties.)

You may think “ah, it’s not such a big deal. It’s only sitting empty a month or two.”

That is a big deal, and that’s big money you are throwing away.  As I explained in my recent article “The Two Most Painful Words a Landlord May Ever Hear…” – vacancies can cause huge profit losses for your business and can quickly turn a good deal into a terrible deal.

Filling an empty unit may seem to be out of your control… after all, the tenants have to come to you, right?

Wrong.

Your ability to effectively market your property accounts for 90% of your ability to get a place rented (according to a survey I just made up but bet is true!)

When you get that “I’m Moving” letter from a current tenant, it’s time to get to work. Find out what advertising medium works best in your area and use it. Stick a sign in the yard, place an ad on Craigslist or in the newspaper, or get that listing up on Zillow.

Better yet… do all three and get max exposure for your empty unit.

Time is not your friend.  A property that rents for $1,200 per month is costing you $40 a day – plus utility charges and the risk of holding onto a vacant property (vandalism, unknown water leaks, etc.)

You wouldn’t throw $40 a day out the window or give it to a street thug… so why are you burning it with a vacant property? You don’t even give your own mom $40 a day, so why burn it with lost rent? Get off your rear end, start doing some marketing, and get that thing rented!

(*However… this doesn’t mean you should accept an unqualified tenant. Screen your tenants like crazy and make sure you get the most qualified person to fill that space. For more on finding a perfect tenant, check out my posts Tenant Screening: The Ultimate Guide and How to Rent Your House: The Definitive Step by Step Guide )

Conclusion

You have a “hole” in your “bucket.” Maybe several holes. And each month, you are losing money from these holes.

I know I am. It hurts.

If you have enough money and don’t mind tossing cash out the window, donate it to me instead and get out of the real estate game! However, if you are set on running a business that produces cash flow and builds wealth for you and your family, it’s time to plug the holes and start running an efficient landlording business.

Do you have any more tips on the three items I’ve mentions? Or is there another “hole” that you see is costing landlord’s money each month? Take a moment and share in the comments below!

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{ 22 comments… read them below or add one }

John Thedford January 31, 2014 at 6:26 am

Good article Brandon and right on!! OK—-got a question for you. I have a tenant that has paid late quite a few times. I gave him a pass last month due to some water issues. I never mentioned the late fee. This month I sent him a text telling him I need a late fee. He has paid the fee a few different months. How can I get it across to this man that I want the money on time rather than the fee? Nothing seems to work.

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Brandon Turner January 31, 2014 at 5:45 pm

Thanks John! Good question… sometimes that’s tough. I have a similar tenant- pays a late fee every month. Some day it’s going to bite me.

I think the answer comes down to a couple choices:

1.) A stern talking-to. (Not my favorite thing to do)
2.) Ask them to leave (if it’s the end of their lease)
3.) Be sure to add any penalties possible in their lease (like, serve a 3-day notice and charge them a notice serving fee if you can.) The money will add up quickly.
4.) Ignore it and just get the late fee :)

Anyways, hope that helps some. I’m in the same boat, and currently just living with #4, but I’m getting tired of it, so I think I need to go to #2 soon.

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Luis veron January 31, 2014 at 8:04 am

Brandon, I am opening real estate brokerage on south florida and I am going to offer single families Managment, can you inform me of property Managment software . Thanks

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Brandon Turner January 31, 2014 at 5:46 pm

Hey Luis,

I know Buildium and Appfolio seem to be favorites around BP!

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Alex Craig January 31, 2014 at 8:29 am

You briefly commented on this in your post, but thought I would share a story that could help those who are considering rent raises. The only thing I will say about arbitrarily raising rents is that you better evaluate your competition in the immediate area. If there are better looking houses with more amenities for the same price or just a tad more, it is possible a tenant could move over a slight increase if they feel they can get a better value in the same area. I ran into a situation on a house I manage where the investor insisted on raising the rent $25; we did and the tenant moved out because there was a house 3 streets over that had granite in the kitchen and stainless steel appliances for only $25 more a more then what her new rent amount was going to be and the deposit was only 1/2 of the first months rent. Long story short, her house sat vacant for 41 days after the tenant moved in, there was a lease up fee and rent ready cost. I believe the loss (not including the mortgage payment) was a $800 lease up fee, $600 rent ready cost and I am guessing a $700 a month mortgage without income. While this is a one off event, I thought it was worth sharing.

Bottom line–get the increase if you can, but really know your market, competition and house.

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Brandon Turner January 31, 2014 at 5:49 pm

Hey Alex – EXCELLENT point. Although I’m a huge advocate for increasing rent, I’m an even bigger advocate of making sure you are competitive. Perfect illustration why!

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Jordan January 31, 2014 at 8:38 am

@John and Brandon do some Landlords dont mind getting the late fee, just as long they get the rent payment.Lets say you have a tenant ever month pays late on the 7th? I guess it will be an issue if you need to pay the mortgage before the mortgage payment. Things happen, being extermely strict is not the solution. I believe in being firm. When I was a student in college, I saw this waiting on scholarship/ grants to come in. Its not that I didnt have the money, its the date the rent was due.However I know if you slack the tenant may take advantage of you. Is there anything as having rent be due in the middle of the month? I know some people who get paid once a month on the 15th, how can that be factor in. What should a landlord do?

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Brandon Turner January 31, 2014 at 5:57 pm

Hey Jordan, my belief is that people can always make it work – and they generally do. Or they pay the late fee. When I first started, I hardly ever charged late fees. Every month, people would call and explain why it was going to be late, and I’d tell them it was okay, they wouldn’t have to pay the late fee. I had 3-5 per month.

However, one month I decided to start charging and to be strict. Each tenant, when they called, I told them there would be a late fee. Ever since… I haven’t had a problem with any of them. It was almost immediate!

So, I make rent due on the 1st, late on the 5th. That’s it. And very few of them have a problem anymore!

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Rick Southwell January 31, 2014 at 1:28 pm

We have a tenant that was always late so we talked with them about if there could be a better solution for them. Results were we put them on a weekly pay. Late only once in 2013 and it cost them as much in fees as it would have to just paid on time. Never been late since. It has been a win win for both of us.

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Brandon Turner January 31, 2014 at 5:59 pm

Not a bad idea Rick! I did that once to get a guy caught up. However, as I grew larger, it became too hard to chase the rent and make special things for different people. It’s amazing, once I started being strict, people didn’t’ seem to have problems anymore! Thanks for the comment Rick!

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S Greenwood January 31, 2014 at 11:24 pm

I have three apartments which I’ve not charged late fees on; resulting in tenants that would pay ‘whenever’.

I recently combined a few ideas I gathered from BiggerPockets – I raised the rents; started charging a late fee on the 5th; and am now using SparkRent which i saw advertised on the blog here.

Usually I don’t respond to any ads, especially web ads. But I already use Intuit for my payroll and trust them for that purpose, so I tried their rent payment service. Here’s what I did for rents:

Each tenant was notified that their rent was going up by $50. For my own convenience, to save driving to the bank as the scattered payments would come in, usually late cash, I asked them to either pay cash on time on the first, or use SparkRent to pay on time by the fifth. For the convenience of sparing me the trip to the bank, I offer them a $25 dollar discount every month. This also gives them an incentive to pay on time. =)

SparkRent does not offer any way to give a discount, timed or otherwise. They do have a late fee option though, so I set their rent at the ‘discounted’ rate and the late fee brings it to the lease rate. My intention was to offer a discount for prompt payment, so as I trotted out this new plan to the tenants, I made that clear. (I imagine that a few months from now, the words “Late Fee” on the payment site will not feel much like discount, but hey).

I did spend some time thinking how to set the new rent and the fee/discount, and settled on the above.

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Brandon Turner February 1, 2014 at 6:28 am

Hey sounds like an awesome idea! That’s a great solution for folks who don’t pay on time. Raise their rent, but offer a big discount for paying. I’m going to have to remember this one! Thanks for sharing!

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Cory Binsfield February 1, 2014 at 1:52 pm

One area that I see landlords throw away hundreds and sometimes thousands of dollars a year is the toilet.

Yup…..landlords are literally flushing money down the toilet. In my area, water runs about $10 per unit from the local utility company. An average person uses 3 units per month or about $30 per month of water before the city tacks on all the other various fees-sewage, local taxes, etc.

Over the last couple of years, I have purchased 3 different multifamily properties where the water use was averaging anywhere from 40 to 60 units per month. As soon as I purchase each one, I immediately started replacing the toilets with low flow American Standard Cadet toilets from Home Depot. These run about $140.00 each.

This, along with replacing drippy faucets or adding aerators, typically results in a 50 percent water savings. Thereafter, I monitor water usage each month and immediately address the problem whenever I see the water usage spike upward. Nine times out of ten it’s due to a running toilet.

Here’s where it gets interesting. On a 8 unit purchase from December of 2012, the water bill average $500.00 per month. It’s down to $250 per month now and has stayed this way for more than a year.

Taking this one step further (for all the muti-family geeks out there) I’ve added another $3,000 in cash flow. Throw in a cap rate in my area of town of 9% and I’ve raised the value of the building by $33,333 in very simplistic terms.

Note: The real number would be lower due to other appraisal factors- maintenance, vacancy allowance, etc.

Bottom line, the seller was literally flushing $30,000 a year down the toilet before I helped him get rid of his headache property.

The next time someone gripes to you about the 3T’s (tenants, toilets and taxes), just smile and think to yourself how grateful you are for fellow landlords who don’t know how to capitalize on these three issues.

Now, get off this site and go buy a property!

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Jordan Thibodeau February 1, 2014 at 8:04 pm

Cory: That’s probably one of the most inspiring toilet related posts I’ve ever read. :-) Well played sir!

Brandon: Great post!

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Nancy Brook February 2, 2014 at 2:02 pm

I have owned my four plex for a year and have been reluctant to increase rent because I don’t want turnover since I’m not in the market at present. Any thoughts on this topic for absentee landlords?

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Darla February 2, 2014 at 6:20 pm

Amen, amen, and amen.

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Robert Steele February 2, 2014 at 8:16 pm

A truism I have learned.

When you have a vacant property it is better to price it below market and get it rented quickly than it is to ask at market or above and take a month of two to fill it. That $1200 rent you miss out on is $100/month. If you took 2 months to get $100 above market rent it would take you 2 years to break even.

The caveat of course is that it is always better to take longer to fill a vacancy with the right tenant than it is to quickly fill a vacancy with the wrong tenant.

Strangely enough I have noticed that it is often the wrong tenant who is willing to pay above market rent. I’m not sure if this is because they are happy to have found a landlord that doesn’t screen properly or because they are hopeless at managing their money.

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Jason February 4, 2014 at 8:19 am

Brandon,

Great post. We keep our properties nice and up to date (within budget) so we can demand top market rents, shorter turnovers, and less turnovers.

We have one tenant who pays the late fee and eviction notice attorney fee each month. An extra $410 each month. It blows my mind. We are trying to resolve their issues so we can save them that money. I have gone to payments on paydays, bimonthly payments, and payments due on the 10th on other properties when the tenant gets paid. While the late fees add to our income, they increase the likelihood of turnover. I try and save tenants money where I can and do things to help my better tenants. That little bit of upfront costs saves me time and money down the road.

Brandon, really liking these posts of yours. Great topic of discussion.

Jason

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Shaun February 6, 2014 at 8:59 pm

Currently guilty on #1.
Have 2 units I need to up the rent on.
1 is my longest tenant and I have never raised her rent. Now until about a year and a half ago market rents in that area had been stagnant since she moved in so there was a real concern of having her move to a cheaper place of comparable quality.
However they have now gone up strong and she is a good $100 under what I think is market. Need to send her a $50 increase…
The other guy is my 2nd longest current tenant but I have less justification to not do it. He moved in right after rents spiked a little in that area so he is paying a good $150 more than I had ever gotten before. They just have continued to go up so I really should keep pace better.

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Patricia February 11, 2014 at 11:37 pm

When we decide on a tenant, we ask them when a good time would be for them to pay the rent and write up the lease according to that date. We will adjust the date one time during the lease. For example, a tenant switched from being paid every two weeks to the 1st and 15th – we moved the rent due date to the 16th for her. If it requested to adjust the date again – we change $50 for the paperwork and time involved to amend the lease. This has worked out very well for all. To us it does not matter which day we get paid. To the tenant it seems to be more important and a service that few rentals offer.
Patricia in Michigan

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James Vasquez April 15, 2014 at 4:16 pm

Great post Brandon, I once sold a few wholesale deals to a few landlords who had a portfolio of over 75 single family residential homes here in San Antonio. The number one thing they did to keep tenants long term and happy, was keep rents low from the beginning. I’m not talking about just keep the rents at “Market”, but to keep rents just below market, so that the current tenants know that they live in one of the best houses for that price / area.

They also did little things like installed certain fixtures and hardware that not only had a long life expectancy & little potential to ever require repair.

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Kimberly H. May 19, 2014 at 10:00 am

Brandon- On vacancies, I assume you wait until the unit is empty when currently inhabited by problem or slob tenants?

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