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!
I think there is a distinction between a real estate investor and a landlord. You can be both but you don't have to. Aside from the two rented guest units I have on my property where I live, I don't manage any of my properties. I don't choose tenants, I don't deal with plungers and I don't collect rent. I hire management companies to do it. So to me, I only have to worry about the first two items on Josh's original list, the third one is to choose the right managers and make sure they are doing their job.
Kudos to Eddie in his outlay of a landlord vs. a real estate investor. My knowledge of the issue of effective management of RE investments is best optimized by hiring solid property managers. This alone reduces many of the problems associated with directly managing one's property. Aside from this, the typical problems as an RE investor are making sure you do not get taken advantage of and if payments is overdue, proceed with an eviction asap.
1. Not structuring triple net leases
2. Doing straight rentals versus lease options
3. Competing with other investors in the rental market bloodbath, attracting career renters who want to be babysat and ultimately destroy the property, and accepting rental rates versus charging a premium for triple net deals with people who want to own a home but cannot qualify for a mortgage
4. Not making the tenant responsible for maintenance and repairs (yes, there are legal ways to do this despite what your state's landlord tenant law dictates)
5. Not requiring payments made via bank draft authorization for direct deposit into your account
6. Not having a home warranty in place to defray the expense associated with repairs
ok, that was 6
Mike, statistically speaking you are correct. Consummation rates of lease option takeouts are horrific with an estimated 80+% not going to takeout but there are mitigating circumstances that cause this.
The number one reason for this is because most investors follow the Claude Diamond approach of lease options and purposefully setup the lease option contract to ensure that the tenant/buyer cannot qualify during the specified term. The purpose here is to constantly churn the option money.
The number two reason is that everything is a priority for a tenant/buyer up until the point in time that they get into the home. After that, it is prop up your feet and watch the big screen time and all thought or efffort for mortgage qualification becomes a distant memory.
This is why we contractually require that tenant/buyers enter into, pay for and maintain credit restoration during the specified term. To discontinue the credit restoration program constitutes a material breach of the contract.
We also go to the added trouble and expense of reporting their payments to Equifax to help generate new positive good credit. All of this is done in an effort to fast track the tenant/buyer for mortgage qualification and ensure the takeout.
The sad reality is that most people have no idea what to do to restore credit or what is necessary in their situation for them to qualify for a mortgage.
This is where investors who want the takeout have to be their partner and coach and contractually guide them in the right direction.
Otherwise, it almost always ends up as you indicated with no one happy with the outcome.
Eddie and Joey
Thank you for posting what I was going to post. Being a Real Estate Investor does NOT mean you have to be a Landlord. I understand MikeOH stated being an absentee owner is a way to fail as a real estate investor.
If you want to be the landlord/property manager, then you are geographically limited. But let me add this. Back in the 1980's, I managed 100 separate rentals as a Property Manager, so I do know what it takes. Also, a bad property manager can be worse than no property manage. But a good property manager is worth his/her weight in gold. I have both bought and sold through a property manager of mine, both ways were a win-win for everyone.
As for the Top 5 LANDLORD Mistakes, I will just re-iterate:
1. Being too lenient on tenants (a myriad of issues here)
2. Putting off needed repairs.
3. Doing or having done, shoddy repairs.
4. Not addressing legitimate tenant concerns.
5. Not doing due diligence when buying, establishing rent amount, raising rent and screening tenants.
On thing I've heard in the past is to have your rentals close by where you live but no one has broughten up distance as a mistake.
I ask because my partner and I have decided to buy our first buy and hold property in the Albany area but we both live in NYC (about 2.5 hour drive). Our reasoning is because even getting a property at a significant discount in NYC it's still almost impossible to have positive cash flow from the start plus for the price of a two family that needs renovations in one of the boroughs we can buy an 8-10 unit up there fully occupied. Also we chose Albany because we are both familiar with the area (He grew up there and I went to school and lived there for 7yrs).
Advice? Are we making a huge mistake?
Top 5 Landlord Mistakes
1. Doing favors for tenants
2. Wanting everybody to like you.
3. Not filing evictions when you're supposed to.
4. Waiting to make repairs.
5. Not hiring a property manager as soon as its it's feasible.
Good post and answers guys. After reading this about the only thing i have done right is screen tenants, and regular property checks.Luckily i have reserves in the bank but none the less i'm starting to feel the crunch at times.I overpayed for the properties , listening to the wrong people, by the time i knew what was goin on my rehabbs were done but the market had changed . So vi decided to rent and hold until the market came around, the only problem is the market aint coming around no time soon...
1. Not charging tenants for damage
2. Becoming friends with tenants
3. Only looking at properties when there is a problem
4. Not having reserve money set aside
5. Not screening tenants correctly
This is my first post. This forum is full of information for new and seasoned LL's I'm happy I found it. 2 mistakes (of the many) I've made was renting to a friend, and an employee. Unless you're willing to loose them don't do it. It becomes difficult to deal with if and when things go bad. A few years ago my friend/tenant lost his job and thought I would understand why he couldn't pay his rent. I felt bad for him but what can you do.This is a business. I gave him the month on me but he had to go. I Lost a month's rent and a friend. I also had to let a employee go recently. Of course, unemployment didn't cover all of her bills. She ultimately wasn't able to pay me the rent & blamed me for her lack of funds. I was sorry but "I couldn't keep a bad employee because she was a good tenant." She had to be evicted. Save yourself the agony rent to outsiders. Always think of the end game first.
Simple rules - stick to the basic's
Block and Tackle
1. you make your money on the buy. I learned this 20 years ago starting in real estate. That's why I did not buy any real estate between 2004 - 2007.
2. screen your tenants - do they have a job?
3. screen your tenants - do they have felony convictions or arrest for drugs or violence?
4. no excuses - the rent is due (I have heard them all - even down to I fell in love with a stripper - no really before the song ever came out)
5. putting to much into the property - tenants will trash the property no matter who they are.
Hi hi
Having owned some property in Brighton and rented it out to student, in all honesty, I think the biggest mistake is trying to do it all yourself. I organised some rental management with Hamptons and it made it all so much simpler!! I would have a try if i were you!
Good luck!
xxxx
Yes, some neighborhoods are filled with properties where retail buyers aren't buying. They aren't war zones, but an investor will beat their head against the wall trying to get any type of buyer other than a landlord.
Why not show some grit and put together a business to buy, hold, and manage these types of properties. It's not for everyone, but it IS right for some.
A # 1 Landlord mistake bar none: inadequate cash reserves.
Why do landlords fail to screen tenants? In a hurry to get that first month's rent due to inadequate cash reserves.
Why do landlords defer maintenance? inadequate cash reserves.
Why do landlords do, or have done shoddy repairs? Inadequate cash reserves.
Why are landlords afraid to raise rents- they fear losing tenants because their financial position is precarious- inadequate cash reserves.
Why don't landlords have adequate cash reserves? The number one reason is that they themselves are not financially stable, and in close second- the property itself was a bad deal.
Basically, it comes down to good financial management, discipline, and organization.
There's no such thing as a late-night infomercial lifestyle. There's no "secret", no "chicken soup" recipe to fix bad habits, and straighten out a complete mess.
At the same time, no amount of skill, knowledge, discipline, organization, or management ability can fix a bad deal. If the math doesn't work, you have some hard decisions to make- most of which involve bringing your own cash into the situation. And of course there are the few that involve crash and burn scenarios like bankruptcy, foreclosure (or both).
1. Last two month's bank statements
2. Last two pay stubs.
3. Most recent W-2.
Not sure if you completed your list, but high up on the list of mistakes is considering that any rental agreement might due. Rental agreements are important documents to protect a landlord interests in a property and need to be reviewed regularly to insure that they will be legal and binding.
The tenant screening process needs to be well defined and insure that it does not discriminate, but allows good tenants to be selected.
Treat your rental property as a business. Collect rents timely and always enforce late and nsf fees.
Getting discouraged because of the "X" factor. Doing due dligence is neccessary but not a guarentee of a good tenenant so don't get discouraged when a good tenant goes wrong.
We did a back ground check on a 6 year veteran of the sheriffs department, a detective whose wife was a social worker. Right off they asked to pay the deposit in two payments. I know, bad sign but this was a detective and they had good pass rental references. Next month 15 days lays on rent and another excuse for not paying the deposit. i ran all over town trying to get the rent. Next month, no payment and the tenant became abusive if not threatening. We called his captain (moral terpitude and all) and got lip service not much else.. Next month, ,a partial on the last months rent but finally agreed to leave. Discovered that in the 3 months in the house they broke the glass out of the oven door, left a puddle of shrimp juice in the refrigerator, discovered what trash they didn't burn in the back yard they threw over the fence, and spray painted our bird baths red (left the cans in the yard). Months latter we got the money for the damages but not the lost rent. Very discouraging to have what appeared to be so good a tenant be so bad. It was easy to think just get out of rentals but obvious where we screwed up and learned not to vary from good rental business practices, even if it's the pope!
Doug
Trying to cut corners. Not responding to the needs of your tenents. [LINK REMOVED]
How many time have I heard Carlton Sheets, and the road to Hell?
Maybe Carlton Sheets is actually a bad tenant in disguise.
How many time have I heard Carlton Sheets, and the road to Hell?
Maybe Carlton Sheets is actually a bad tenant in disguise.
A property that produces negative cash flow can be a long lasting mistake. It is very important to understand the costs of RE ownership.
Believing a Tenant or potential Tenant will actually do what they say.
I'm on my third set of approved potential tenants for my first rental house. They apply, say they will take the property, schedule an appt to pay Rent + Dep +sign lease.... Then either no-show or call to cancel or reschedule twice, then back out.
Lesson learned: NEVER tell any other potential tenants that the house is rented until you have a signed lease with $ in hand. Cost me a week of lost marketing the first time. Never again.
Well I just had to file for eviction yesterday. This is only the second time ever I have had to evict in ten years. The first time was not through negligence on my part - I inherited the tenant with the property. Oh I've had to threaten before and I have kicked tenants out, most often with cash for keys.
If I had to sum up the reasons for these previous times I'd say it was because they were class C rentals in blue collar neighborhoods. One always seems to be chasing those people for rent. Since moving to class B white collar neighborhoods I haven't had any problems collecting rents. As someone pointed out, even though the cashflow/ROI/cap rate (take your pick) is higher on class C, they are a PITA to collect rent on.
My one exception is the tenant that I am eviciting now. The mistake I made with this tenant was not doing a good enough background check. I was distracted with life at the time and even though a red flag went up on her income verification I was wood by the previous landlords glowing recommendation and prospect of nabbing a long term tenant. She was self employed. So no pay stubs or W-2s. Instead I asked for last years tax return. Turns out it was bogus. I should have asked for bank statements too.
After renting for a year she stopped paying and has since provided me with a litany of excuses that I have heard all before. Unfortunately, in retrospect I made a second mistake, not evicting sooner (although I would argue that this is not always a mistake - see below). We gave her until the 15th and still no rent. I should have started the eviction process right then. She said before then end of the month. We stupidly said ok. Then the excuses/lies really started coming thick and fast. She said she mailed it this weekend because we didn't call her? even though we told her specifically not to mail it. (previous evicted tenant did the same thing). So I called her bluff and said to fax the cashier check stub. She said she would do it when she got home at 6pm. I told my partner that this was another deception and to go ahead and file that day. Sure enough, no fax was forthcoming because there was no cheque mailed I bet. (previous evicted tenant did the same thing). It is funny how they follow the same playbook.
So why do I think it was not a mistake to IMMEDIATELY evict her? I have covered this topic in the past but to summarize; I still have two good long term tenants because I let them pay 15 days late when they hit a bad patch instead of immediately terminating occupancy. Usually I trust my gut on this. This time I did not trust my gut.
Screening and rent collecting from tenants!!!
Above my rent role I have taped to my file cabinet that I check off as each tenant pays I have a Post-it that says....
RENTERS ARE MOOCHES GET THEIR MONEY!
just a reminder to self that I have to do my job and that sometimes means acting like a mean landlord and not taking their sometimes really awesome excuses..
Some duplicate of others posts but all based on my experience...
-Not having a plan... most landlords end up being landlords when that was never the plan. You better have a plan.
-Not properly screening tenants
-Unrealistic expectations of tenants
-Choosing the first tenants that is "willing to pay" only to realize they really can't afford.
-Accepting Personal checks... I hate personal checks. (P.S. Certified funds are not hard to ask for).
-Trusting all GURU's... big mistake.
- Not asking enough questions (part of having a plan)
P.S. Thanks for doing this...