The Top 5 Landlord Mistakes
Joshua D.Pro Member
BiggerPockets Founder · HI · Member since 2008 · 16k+ posts · 5k+ votesI'm looking to see if we could compile a list of the top 5 mistakes made by landlords. I'll throw out a few and hopefully we can come to some kind of consensus.
Note - to all who participate, we're going to give you all a plug in an upcoming blog post on the subject. Thanks in advance!
My Short List:
- Overpaying up front - paying too much for the property, resulting in diminished cash-flow
- Failure to understand financial management of a property
- Leniency - not going after late paying tenants immediately
- Failure to address problems with your rental units ASAP. Small problems often explode into huge ones when ignored.
- Overcharging / undercharging rent
Add your own or expand upon this list and we'll start to narrow things down to a list of 5 (10 if we must).
1. Not Putting a Dollar Value on Your TIme
One example is this: If you have over 4 properties, my advice is to hire a good management company. One of the biggest mistakes I see investors make is that they try and do everything for themselves. Spending hours marketing, showing properties and doing handy work to save a few hundred dollars. Your time is worth money, and you need to figure out that equation for yourself. I would rather play with my kids on Saturday than snake a toilet to save $200.
2. Not being in Touch with Reality
We see too many Investors trying to sell properties based on false rent rates and/or showing higher cash flow than what will really happen. In return, we see too many buyers fall for it over and over again. I know, as folks come to me often to clean up their mess!!!!
I can show investors cheap properties in sub par neighborhoods with $500 a month cash flow too, on paper! However, collecting the rent in the real world is a different story!!!
Our focus is to buy and sell in neighborhoods where we have the odds of collecting rent in our favor. We might only cash flow $150 to $200 a property, but we actually get the rent every month! The other folks might hit for a couple of months, but the vacancy and repairs will only out them in a negative situation.
3. Not Realizing that here is more to cash flow then the money that you physically put in your pocket each month.
As most of you know, I do not live and die by the 50% and 2% rules that are so often discussed in this forum. I have been beaten up pretty good over disagreeing by folks in here, but hey, if I followed the rules of others, I would probably be working for someone else right now. :wink:
While i am not going to give accounting advice here, there is so much more to this than the money you put in your pocket at the beginning of each month. There are no simple rules, or easy paths in real estate.
Make sure you find a solid accountant and understand pre and post tax cash flow, depreciation, how to deal with expenses, equity, ect......
4. Not Understanding Risk
Real estate investing involves risk. Period! No way around it folks. You need to keep some reserves, and plan ahead.
Also, plan your exit strategies. If you get in trouble, can you sell that inner city dupex or quad quickly? Will a lender approve a loan on the property? Do you have enough equity?
Keep these things in mind. The reason why my company puts a focus on single family homes in solid blue collar neighborhoods is all based on exit strategy. We have enough equity to sell them to investors for cash flow, and enough reserves to try and sell them on the traditional market while vacant for 60-90 days for showings.
5. Not Having a Business Plan
This should probably be #1, as this is the most common of all mistakes. However, my experience is that folks usually remember the last thing they read, so I put it here since it is so crucial to your success.
If you own rental properties, you own a business. Please treat it as such. Create a business plan and evaluate it as necessary. This is not a hobby, hobbies cost you money, they do not make you money.
These are just a few issues to think about.....there are many more.....but look at these concepts, plan ahead, and it will give you a good foundation to get started, or back on track.
Good Luck!
Having unrealistic expectations about cash flow. Believing the realtor or seller when he says that the property has positive cash flow. To them it is positive as long as it covers PITI, which totally ignores all of the other expenses.
:cool:
Being under capitalized. I got my Carelton Sheets packet and soon bought my first rent house no money down. But due to having no backup funds, mortgage due, I had to rent quick, and started the road to hell.
Also too lenient. I have to fight that one still today.
As a database guy, I always consider the biggest mistakes to be those that don't appear for a while, but propagate through your system. Applying it to real estate, my big one is buying in a declining area. When you do this, you may not realize it for a while, but by the time you do realize it, you're already committed and chances are you'll lose a lot of money while you own the property and when you try to sell it.
Can't say I agree with Josh's point about overcharging/undercharging. This usually becomes obvious quite fast. But a lease with low rent will have a major effect.
We all know that the vast majority of newbies fail in the rental property business. Therefore, I would consider the two mistakes that cause them to fail to be the most critical.
The number one reason that newbies fail is that they don't understand the real world operating expenses. Armed with this ignorance, they underestimate expenses and believe that a property will be profitable when in fact it will lose money (often, a LOT of money). This causes them to pay too much for properties, which is a certain recipe for failure.
The number two reason that landlords fail is that they don't know how to deal with tenants. This can be broken down into a lot of different facets including:
1. improper screening of tenants
2. failing to have a written screening process and acceptance criteria
3. accepting late or partial rent
4. failing to IMMEDIATELY evict non-paying tenants
5. accepting excuses from the tenants
6. being an absentee (hands-off) landlord
7. failing to aggressively fight lawsuits
etc, etc, etc.
I have bought properties from many landlords who were absolutely DESPERATE to sell. Many have told me that they were literally physically sick and couldn't sleep because of the stress the tenants were causing them. Dealing properly with the tenants will greatly decrease these stresses and increase the chance of success.
Mike
I think that I am working to much, therefore; spending too much money. If a tenant ask for something and if it's a reasonable request, I do it. Next thing you know I have 200 bucks wrapped in a project. I think I need to start looking at my expenses a little closer and making sure that these fixes are truely going to produce a ROI.
Overpaying and ignoring the real world expenses.
Also thinking that you can put a rental on auto pilot like you can a CD.
-Michael
I was going to post, but MikeOH stole my thunder :mrgreen:
To this list, let's add: Not treating the management side of the business professionally-- things like having a seperate phone, answering machine, letterhead and a dispassionate, "this is just business and you're trying to argue with a wall" speaking voice.
If tenants think they're dealing with a soccer mom, they'll treat you like a soccer mom.
Not understanding that most tenants think they're "entitled". Landlords have an automatic problem with this attitude. When you understand what entitlement is you've automatically going to be more businesslike with your tenants.
Getting in a hurry will always cost you dearly. Get those credit checks and applications no matter how desperate you are.
Trying to help a tenant will always cost you dearly no matter how many years they've rented from you.
Not knowing when to sell a property. I sold three two summers ago and couldn't get those prices today. It felt like the worst possible move at the time but turned out to be the best move.
Not planning for the big cash expenses like roof, windows, siding, decking, exterior painting, lead paint abatement...
Every few years I got surprised with a new $5,000-$45,000 improvement. It wasn't hard to separate out the cosmetic ones from the necessary ones, but still.
In addition to PITI, positive cash flow must also cover the operating expenses (daily maintenance, PM, advertising, turnover...) as mentioned above, but also the long-term costs of the asset class: improvements.
I know they have been covered, but poor screening of tenants.
Check to see if they are actually employed, see if they were ever late on payments with their previous landlords, etc.
COMINGLING of funds. Set up a separate bank account for the property from your own personal account. Don't spend all cashflow so you can have reserves ready to go when the water heater goes, the furnace, etc.
Finally, putting of routine maintenance is a big no-no. The old saying is true, an ounce of maintenance saves a pound of cure.
1. Not Putting a Dollar Value on Your TIme
One example is this: If you have over 4 properties, my advice is to hire a good management company. One of the biggest mistakes I see investors make is that they try and do everything for themselves. Spending hours marketing, showing properties and doing handy work to save a few hundred dollars. Your time is worth money, and you need to figure out that equation for yourself. I would rather play with my kids on Saturday than snake a toilet to save $200.
2. Not being in Touch with Reality
We see too many Investors trying to sell properties based on false rent rates and/or showing higher cash flow than what will really happen. In return, we see too many buyers fall for it over and over again. I know, as folks come to me often to clean up their mess!!!!
I can show investors cheap properties in sub par neighborhoods with $500 a month cash flow too, on paper! However, collecting the rent in the real world is a different story!!!
Our focus is to buy and sell in neighborhoods where we have the odds of collecting rent in our favor. We might only cash flow $150 to $200 a property, but we actually get the rent every month! The other folks might hit for a couple of months, but the vacancy and repairs will only out them in a negative situation.
3. Not Realizing that here is more to cash flow then the money that you physically put in your pocket each month.
As most of you know, I do not live and die by the 50% and 2% rules that are so often discussed in this forum. I have been beaten up pretty good over disagreeing by folks in here, but hey, if I followed the rules of others, I would probably be working for someone else right now. :wink:
While i am not going to give accounting advice here, there is so much more to this than the money you put in your pocket at the beginning of each month. There are no simple rules, or easy paths in real estate.
Make sure you find a solid accountant and understand pre and post tax cash flow, depreciation, how to deal with expenses, equity, ect......
4. Not Understanding Risk
Real estate investing involves risk. Period! No way around it folks. You need to keep some reserves, and plan ahead.
Also, plan your exit strategies. If you get in trouble, can you sell that inner city dupex or quad quickly? Will a lender approve a loan on the property? Do you have enough equity?
Keep these things in mind. The reason why my company puts a focus on single family homes in solid blue collar neighborhoods is all based on exit strategy. We have enough equity to sell them to investors for cash flow, and enough reserves to try and sell them on the traditional market while vacant for 60-90 days for showings.
5. Not Having a Business Plan
This should probably be #1, as this is the most common of all mistakes. However, my experience is that folks usually remember the last thing they read, so I put it here since it is so crucial to your success.
If you own rental properties, you own a business. Please treat it as such. Create a business plan and evaluate it as necessary. This is not a hobby, hobbies cost you money, they do not make you money.
These are just a few issues to think about.....there are many more.....but look at these concepts, plan ahead, and it will give you a good foundation to get started, or back on track.
Good Luck!
Honorable Mention:
6. Cutting too many corners on your rehab and/or not doing deferred maintenance
The fact is: A sub par rental home will attract sub par tenants.
If you own a rental home, you have a responsibility to provide a good, safe place for a family to call home.
Just because a past tenant tore up your home does not mean the next one will. If it happen over and over, look in the mirror at you, or your management companies screening process.
I am not saying you need to have the Taj Mahjal here, but a good, safe, clean place that a person can call home can go a long way to preventing financial headaches.
Words to Live and Invest By:
When you go to save a nickle, just make sure you are not stepping over a dollar!
Let me expand on the point that was already made by Joshua about buying correctly.
In this market of lower property values there is no excuse for you not to learn to buy property at 50% of current value.
Not only will you benefit by having better cash flow on a monthly basis with your rentals, you will also be in a better position with equity when the market rebounds in the coming years.
My second contribution has been repeated by almost everyone here. CHECK OUT your tenants and see if they have any bad history before you rent to them.
Not doing monthly inspections of the property...its amazing how fast people can distroy a place!!!
Also not rehabbing the big things up front. Example- I had a roof with an estimated 2-4 years left. Well the tenant never bothered to tell me it was leaking in a cabinet!!! Instead of just replacing the roof; then I had to replace part of a ceiling and ktichen cabinets!!!
Not in the same order, but I would vote for Harrison's top 6.
I have to agree with all postings. My number one issue is being too lenient with my tenants regarding late payments. In addition, buying an investment property in an area where the value has depreciated. OH BOY!!!
I think the one mistake I made with my one and only rental property is not correctly adjusting the rents of the existing tenants.
I was nervous they would pick up and leave. Turns out they were more than happy to pay the additional money b/c of the improvements.
As said,the LAST problem you had,,makes you remember it BEST!!
Had a 1 bedroom house about 600 square foot that I detailed to 'nice' condition.
Rented it to am immigrant that I could not converse with since I am versed in that lanquage. Always thought there were alot of different people around,,didnt think too much of it because thats normal in there culture,,,beer bottles all over!!
AFTER they moved out,,finnally found out from some gracious neighbors(grrrr.)(could have they ONLY told e sooner??) that there were NO less than 15 people living in there.
The house is a complete disaster and in process of an exstensive remodel now,,all due to my FAILURE to make and ENFORCE occupancy numbers policy. It was actually rented BY a property managment company I had at the time,,,
hands on personal management is preferable to ANY management company you can ever hire!!
It will NEVER happen to me again!!
I just wrote an article about this very issue a couple of weeks ago.
http://boiserealestatesoup.com/2009/01/19/11-things-that-you-arent-doing-for-your-rental-but-should/
The 1st mistake that Landlord's make is becoming a Landlord. The only way that I would be willing to be a Landlord is via a lease option agreement (Lease-To-Own). In that case, the tenant would be responsible for repairs. I would Lease-To-Own for 12-24 months and then have the tenant cash me out by getting a loan from a mortgage company. If at the end of the Lease-To-Own term, the tenant is unable to get a loan, and if I am STILL wanting to collect a monthly income stream then I would reiterate the same process of putting a Lease-To-Own agreement in place for another 12-24 months to which would keep me from having to make repairs on the property. This would alleviate Landlord nightmares and increase my profit margin. This is Tonya of Texas, wishing you guys Happy Success~
That sounds good, but it doesn' work that way in the real world. In the real world, the vast majority of lease-option "buyers" never buy the property. In fact, they are just as likely as any other tenant to cause problems, including: failing to pay the rent; damaging the property; committing crimes (especially drugs); allowing their dog to damage the property or bite the neighbor; etc, etc, etc. In addition, in many states, it is ILLEGAL to require the tenant to maintain the property. Even if it is legal in your state and you require the tenant to do the maintenance, they often simply don't do the maintenance and when they do, they often do it incorrectly. Furthermore, you own the property and if they do a substandard repair that causes someone to get hurt, you are going to be responsible.
I'm not against lease-options and have done them myself. I'm just trying to add a little reality to the hype.
Mike
I had one tenant who gave me a false employer and rental reference. For all I know, she also gave me a false NAME. i.e. get a copy of their driver's license.
When you call their reference, ask the LL alot of ?s to make sure they actually are a landlord or employer.
I've also kept bad records, failed in not sending out late notices or eviction notices early and been too lenient overall.
I would assume that you do everything you possibly can during the screening process to ensure a stable renter. But things do happen in "life" and renters do become delinquent in more ways than one.
In the instance of late payments or complete failure to pay, and eviction is inevitable, what are the laws regarding eviction and are there laws that protect against eviction?
If so, what are the ways around it and how can one ensure that an out-raged tenant doesn't become destructive?
Obviously laws vary based upon location. I'm in the Los Angeles area.
I would have to say that not 'sure-ing' up your tenants and your property with all the legal documentation necessary so you know your rights, the tenant's know theirs and you don't end up in court unnecessarily, thus creating further expenses.
As a new landlord, you need to be protected on every level from the very beginning of your landlord-tenant relationship. Knowing the laws in your state regarding lease agreements is the first step and a huge one. Every state has different laws for their leases. Don't 'think' you know... KNOW you KNOW! [SOLICITATION REMOVED]
Best,
Stirling