Landlording & Rental Properties

4 Costly Mistakes Landlords Make That Limit Profitability

Expertise: Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate News & Commentary, Business Management, Real Estate Deal Analysis & Advice, Real Estate Marketing, Mortgages & Creative Financing
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No matter which way you slice it, you’re in the business of turning a profit. You didn’t become a landlord as some saintly act of giving back to society.

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You did it because you want to put your money to work and generate income. Unfortunately, you may be making costly mistakes that are killing your profitability.

4 Expensive Mistakes Landlords Must Avoid

Successful landlords aren’t cheap, but they are definitely cost-conscious. In other words, they understand that costs add up over time, so they make smart choices to maximize revenue.

For example, a $100 mistake might not seem like a big deal in isolation. But if you’re making a $100 mistake every month on three different properties that you own, you’re costing yourself $300 per month—or $3,600 per year!

This can create cash flow issues and prevent you from being able to accomplish your long-term goals.

There’s a time and place for spending money to set yourself up for success. However, there are also ways you can limit your expenses to maximize your revenues. Here are some expensive mistakes to avoid.

1. Investing in the Wrong Properties

You make your money when you buy a property. Repeat that out loud: You make your money when you buy a property.

The biggest profitability problem landlords have is created by investing in the wrong properties—or overpaying for the right ones. If you make either of these mistakes, you’ll find it nearly impossible to generate a profit that’s worth your time and energy.

Bad properties have slim margins and a tendency to need lots of work. While you won’t find a perfect rental property, you should practice greater patience and seek out ones that have the opportunity for greater gains. This will provide more margin for error.

2. Poor Tenant Screening

After selecting the right property and making a smart investment, nothing matters more than tenant selection. And if you don’t have the right screening processes in place, you could seriously impact your long-term profitability.

A bad tenant will cost you in multiple ways, including:

  • Late rent checks and/or missed payments
  • Lack of care for property (frequent maintenance issues)
  • Violation of lease agreement terms
  • High turnover
  • Failing to leave the property in good condition upon moving out

The list could go on and on. If you aren’t carefully screening tenants, then you’re taking a major risk.

Should you end up with a bad tenant who has financial issues and a lack of regard for your property, it could cost you thousands of dollars. By enhancing your tenant screening, you’ll minimize these instances and maximize profitability.

Related: Tenant Screening: The Ultimate Guide

3. Overpaying for Insurance

In the pursuit of efficiency, a lot of landlords make the mistake of quickly accepting whatever insurance or personal loan products they're offered. However, in their haste to move on, they end up overspending.

It’s easier than ever to shop around and compare rates. Services like GoBear allow people to analyze and compare hundreds of products from dozens of providers in a matter of minutes.

Landlords who are conscientious about saving in this area will enjoy meatier profits.

person holding house key with living room in background

4. Selecting the Wrong Finishes

Be smart with the finishes you choose for your rental property. You want designs that look good yet don’t require expensive replacements after every tenant moves out.

Carpet, for example, is cheap and easy to ruin. Stains, rips, and snags often mean landlords have to replace it between each tenant.

For a little more money, you could purchase vinyl plank flooring and get a better look with greater durability and longevity.

Related: 3 Rental Property Expenses Investors Should Always Anticipate

Take Control Over Your Cash Flow

In the end, there’s a very fine line that separates highly successful landlords/real estate investors from the average ones who barely scrape by. It comes down to purposeful cash flow management and intelligent, proactive decision-making.

Profitability is the name of the game. If you aren’t doing everything you can to increase revenues and limit expenses, you’re missing out on a chance to maximize your profits.

Hopefully this article has given you an idea of some of the mistakes that should be avoided so that you may make smarter decisions and seize new opportunities.

What other mistakes have you heard about landlords making? Have you personally learned any lessons the hard way?

Share in the comments.

 

Larry is an independent, full-time writer and consultant. His writing covers a broad range of topics including business, investment and technology. His contributions include Entrepreneur Media, TechCrunch, and Inc.com. When he is not writing, Larry assists both entrepreneurs and mid-market businesses in optimizing strategies for growth, cost cutting, and operational optimization. As an avid real estate investor, Larry cut his teeth in the early 2000s buying land and small single family properties. He has since acquired and flipped over 30 parcels and small homes across the United States. While Larry’s real estate investing experience is a side passion, he will affirm his experience and know-how in real estate investing is derived more from his failures than his successes.

    Lee Keadle
    Replied over 6 years ago
    When it comes to real estate investing, it’s really about the long term. Especially when you look over the past few years, it can be easy to get caught up in the short term losses in value or rental income. Sometimes it’s important for investors to remind themselves that they’re in it for the long haul. Although they may have lost money in the past few years, they’ll be able to reclaim all of it (and more) in the long run.
    Glenn Schworm
    Replied over 6 years ago
    That is very true Lee. Some people think nothing of cutting someone out of a deal to make a few bucks. If they stay in the game long enough that situation will come back to bite them. I try to always look at the big picture and that includes long term. Thanks for the comment.
    Sharon Vornholt
    Replied over 6 years ago
    Love the post Glenn, and I can completely identify. One thing I would strongly encourage everyone to do, is “do your own negotiation”. Don’t get an attorney in the middle. This isn’t meant to downplay what attorneys can do when you need them. But in real estate, you are better letting go of (irrational) emotions and doing your own “bidding”. After 17 years in the home inspection business, I found that attorney’s look at every dime you pay out simply as “the cost of doing business”. In other words, just pay up and shut up. When I quit hiding behind attorneys when a home buyer would call with a “perceived problem” and simply address the issue (even if it meant saying no to them) most of my problems were solved fairly and with much less stress. They were certainly solved without the big legal bill for something I should have been doing anyway. Real estate is a people business. As the owner, you are the face of the business so deal with your problems yourself. It will almost always be easier and cheaper for you. Great post even though it brought back memories from my “past life”. Sharon
    Glenn Schworm
    Replied over 6 years ago
    Very true, I went against my normal routine and hence the problems! Attorneys don’t usually take into account all of our holding time and costs if we have to resell. It is easy and free for them to tell us to walk. Hey, it’s not their money! 🙂 Thanks for the comment Sharon.
    John Thedford
    Replied over 6 years ago
    Guilty as charged…..
    Glenn Schworm
    Replied over 6 years ago
    John, I think we all are from time to time. Hopefully we get less guilty as tome goes on!
    Eric Harrell
    Replied over 6 years ago
    This is why I drive a dependable older car instead of a new BMW or Benz. Keeps me grounded and in the right state of mind, heck, if I had a new Beemer I’d probably be thinking crazy thoughts like, “The buyer is wrong, I’m right” or “I’m the most intelligent investor out there”, its good to be grounded and focused.
    Glenn Schworm
    Replied over 6 years ago
    Eric, being grounded is always a great thing. Never forget where you came from, because in a heartbeat we could all be back there! Great advice!
    Gary Parker
    Replied over 6 years ago
    I so enjoy these blog posts that reinforce what I need to know every day. Greed and wanting to win the battle sure have cost me the war in the past. This is good advice not only for dealing with potential buyers but also your team such as contractors, title, and on down the line. Has anyone fought with a contractor over a few bucks then regretted that he wont work for you any longer as soon as demand for their services pick up? Great blog post!
    Glenn Schworm
    Replied over 6 years ago
    Never! Ha Ha!! That has happened more times than I can remember. Now we pay a higher price, of course they still want more, but we keep it in check and they keep coming back. Great example of losing a battle to win a war. Thanks Gary!
    Rita Phillips
    Replied over 6 years ago
    Ahhh, Glenn. You gotta love a guy that can admit his mistakes. 🙂 Heaven knows we’ve all made plenty of ’em ourselves! Enjoyable read.
    Glenn Schworm
    Replied over 6 years ago
    LOL, Rita, if I just wrote on my mistakes I would have enough material to take us into the 22nd century!! Thanks for the comment, made me smile.
    Michelle
    Replied over 6 years ago
    Enjoyed your post Glenn! And I really liked the teapot analogy – yes, I could see the image in myself from times past! Your words definitely ring true in any part of our lives where we deal with others.
    Glenn Schworm
    Replied over 6 years ago
    Thanks Michelle!
    Karen Rittenhouse
    Replied over 6 years ago
    My husband always says, “he who gets the money wins.” Keep the negotiations going until they say “yes.” Keep the ego out of the way – if only that were easy…. Thanks for your post, Glenn.
    Glenn Schworm
    Replied over 6 years ago
    Yes…if it only were that easy! 🙂 It sure looks simple when we describe it, it is the real world implementation that can get us!
    Shaun
    Replied over 6 years ago
    Good points to think about. It is a delicate balance between not giving away the farm but not killing deals over relatively small things. You can’t just agree to put a new roof, or something else of that ilk, on every house just because they ask for it, but you have to evaluate the situation to see if that is the wise choice. If you get multiple offers at or above list on day 1 and they ask for that stuff you say no and if they don’t cave right away you cancel the contract and start calling the other buyers. In this case it sounds like it was sitting close to 2 months in a market with a lot of inventory, so it would have made sense to at least negotiate some (Maybe offer a $2K credit towards doing the roof at some point). Great read!
    Glenn Schworm
    Replied over 6 years ago
    Thanks Shaun, as you can imagine there was a lot more back story that I needed to get into o this deal, just needed it over so we could move on! I agree with all your points. Have a great week!
    Matt
    Replied over 6 years ago
    Hi Glenn, This post is full of wisdom. My father taught me to “never be emotional unless you plan on it”. There are some times when taking a passionate stance or appearing angry can be the right thing to do, though I believe they are few and far between. More important it to control our emotional reactions to external events, and take the time to measure our response, like you advocate above. Great post! Matt
    Glenn Schworm
    Replied over 6 years ago
    Matt, your Dad sounds like a wise man. I have never heard it put that way before but I really like it. Thanks for the comment!
    Barry H. Investor from Scottsdale, AZ
    Replied 5 months ago
    Excellent brief recap of the big failures. I have failed on every one of these categories, except perhaps picking the wrong finishes. My props are lower end and I knew from my first rental that you have to make them bullet-proof for that tenant pool – they (unfortunately) never had role models to teach them about respect for and care for real property. I have paid dearly for making these mistakes – but it is a learning process and if you remain persistent, the cash flow can become a reality. 🙂
    Dave Rav from Summerville, SC
    Replied 5 months ago
    All valid points. Thanks. If I could expand onto this… Buy materials you KNOW you will need when they’re on discount. Whenever I’m at the big box stores, or stores going out of biz, I take a quick moment to look at the clearance section. Those items that I’m sure to use (neutral paint, lighting, door hardware, etc) I snap em up. I’ve often gotten items and materials for 50% off or better.
    Jerome Kaidor Investor from Hayward, California
    Replied 5 months ago
    Be careful about shopping for insurance! A cheap insurance company might not be a bargain. They may well send out an inspector. Will you be good enough? In 2003 our complex wasn’t good enough. The insurance company sent out a punchlist of some 15 items. We promptly complied, but they dumped us anyway. We had to go on “surplus lines”, which was amazingly expensive. I figure we spent an extra $40K on insurance over two years. Recently, we changed insurance on one of our smaller buildings. Saved some $3K a year. Yay! Or maybe not yay? They sent out an inspector. Whups, they want us to replace all the electrical breaker boxes. SF Bay area – skilled trades are expensive. $6K ka-ching! Call from the contractor: “City wants a separate permit for each breaker box. $2900 – ka-ching!
    Marie D.
    Replied 5 months ago
    I’m shopping for property insurance for both existing and future properties so I was interested in GoBear mentioned in the article. When I look it up, they provide insurance comparisons in Asia. Do I have the wrong company? Any leads would be greatly appreciated.
    Janet Gezork Virtual Assistant
    Replied 5 months ago
    hiho!
    Ken Bussen Investor from Saint Charles, Missouri
    Replied 5 months ago
    I have problems raising rents. I would like to see some articles on how to raise rents and keep tenants.
    Howard Greisman Investor from Jacksonville, Florida
    Replied 4 months ago
    I’ve used this and it seems to work. “This Notice is to inform the Tenant that the Landlord will be increasing the Tenant’s rent due to increases in property taxes, insurance and to bring your rent closer to market rental rates.” I increase 3%-5% a year. Not a lot so they will leave, but it all adds up.