4 Costly Mistakes Landlords Make That Limit Profitability

by | BiggerPockets.com

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.

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.

 

About Author

Larry Alton

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.

5 Comments

  1. Barry H.

    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. 🙂

  2. Dave Rav

    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.

  3. Jerome Kaidor

    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!

  4. Marie Denis

    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.

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