Landlords’ returns are only as good as their property management.
Unlike owning, say, shares in a mutual fund, bonds or private notes, holding rental properties is not 100% passive. Rental income does require some work — and some skill to boot.
I see many mom-and-pop landlords make the same mistakes again and again and again. Here are six unacceptable things I see too many landlords doing — and how to make sure you approach your rental management better.
1. Pocketing All Their Cash Flow
Everyone, landlord or not, should have a cash reserve. For personal expenses, financial experts refer to this as an emergency fund.
But landlords need to set aside a lot more cash than the Average Joe.
Remember when we broke down rental property expenses visually? Most landlord expenses don’t come evenly every month; they happen in intensive, expensive bursts. A $5,000 roof bill. A $4,000 HVAC bill. Turnover expenses to prepare the property for new tenants. Vacancies. And so on.
Landlords need to set aside a certain amount of their rental income every month in a separate account to cover these large, irregular expenses. Failing to do so sets you up for a crisis: “What am I going to do?! I don’t have $3,000 just lying around for those repairs!”
2. Putting Off Repairs
The result of not keeping a rental reserve fund? Putting off repairs.
The longer you let repairs slide, the more expensive they tend to become. Physical problems with your property tend to get worse over time — sometimes quickly.
This goes doubly for roof and plumbing leaks!
But it’s not only the relatively urgent repairs like leaks that should be done immediately. Even cosmetic issues can lead your tenants to not renew their lease, creating a turnover (which is where landlords spend the most time and money).
Besides, during a turnover you’ll probably have to make the cosmetic repair anyway to attract better tenants moving forward.
When you conduct semi-annual inspections (more on this momentarily), ask the tenants about any needed repairs. If they name a series of repairs that are needed, and you can only afford to make one or two at the moment, take the tenant’s views into consideration when prioritizing the repairs.
3. Not Inspecting the Property at Least Once a Year
At a bare minimum, physically visit and inspect each rental unit at least once a year.
Better yet, inspect two, three, or four times a year.
First, to catch any needed repairs early, as discussed above. You can’t count on your tenants informing you of repairs—I’ve had tenants fail to inform me of needed repairs because they didn’t want anyone coming to the house and discovering that their boyfriend had moved in.
It also keeps your tenants accountable. You’ll discover the deadbeat boyfriend and can raise the rent (or evict him). You’ll also be able to check for other lease violations and see how the tenants are treating your rental unit.
Beyond catching lease infractions, it also serves as a strong deterrent for violating the lease in the first place. If your tenants know you inspect the rental unit every few months, they probably won’t let their deadbeat boyfriend move in at all.
Nor is it all about discipline and lease enforcement. Inspecting the property shows the tenants that you’re not an absentee landlord and that you genuinely care about the property. That, in turn, sends the message that they should care for the property, too.
Far too many landlords get lazy and never visit their rental units as long as the rents keep flowing in on time. Make the effort — it will pay dividends in the long run.
4. Deducting the Cost of Wear and Tear From the Security Deposit
Landlords can deduct the costs to repair “damage” from the security deposit. They can’t deduct the costs to repair “normal wear and tear.”
Which is all fine and dandy, except “normal wear and tear” is an incredibly subjective term. It leaves plenty of room for interpretation, which can make it a blurry line to draw.
A fist-sized hole in the wall is clearly damaged. A small nail hole in the wall is often considered normal wear and tear. But what about a large nail hole?
If a tenant moves out after one year and the walls are covered in scuff marks and needs repainting, it may be considered damage. But if a tenant moves out after five years, the same degree of scuffing is probably considered normal wear and tear.
If there’s one lesson I’ve learned the hard way (many times, to my embarrassment), it’s that you always need a detailed move-in/move-out walkthrough report, complete with time-stamped photographs of every wall, every floor, every door, etc.
Whenever you deduct money from the security deposit, be prepared to fight your ex-tenants in court over it.
5. Not Allowing Pets
Ready for some controversy?
Many landlords absolutely will not allow pets. Hard stop.
And I get it. Pets do cause more wear and tear on your properties. In some cases, they can even create liability for you as a landlord.
Here’s the thing, though: More than two-thirds (68%) of American households own a pet. If you don’t allow pets as a landlord, you’re turning away all but 32% of prospective renters, before even looking at their other credentials.
Worried about pet wear and tear? Charge a non-refundable pet fee or a refundable pet deposit. I also charge $15/month per pet in pet rent.
Worried about liability? Don’t allow specific breeds that have breed-specific liability and require tenants to buy renters insurance that covers pet liability.
The other problem with a blanket policy barring pets? Many renters will simply sneak their pet in regardless.
Regulate pets, charge accordingly, and benefit from higher deposits, higher rents, and an applicant pool three times larger.
6. “Setting It and Forgetting It”
I’m not one of those real estate evangelists who put everything in real estate and ignore other investments. For example, one of the great benefits of buying index funds for long-term investing is that they’re truly passive. I can buy index fund shares then forget about them.
Rental properties, for all their benefits, aren’t completely passive investments.
Most mom-and-pop landlords have a full-time job, which makes landlording essentially a side gig. A side hustle. A part-time job.
Whatever you want to call it, it does require some work. Not daily work, and sometimes not even monthly work, but work nonetheless.
Far too many landlords think they can simply sit back, collect rents and call it a day. That’s unreasonable for any landlord who wants to earn a decent return.
Improve your property management, and improve your returns!
What unacceptable landlord behaviors have you witnessed or experienced? What do you do differently now as a landlord than you did before?
Share your thoughts and tips below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.