The Top 5 Landlord Mistakes
Joshua D.Pro Member
BiggerPockets Founder · HI · Member since 2008 · 16k+ posts · 5k+ votesThe Top 5 Landlord Mistakes
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Indianapolis, IN · Member since 2008 · 759 posts · 185 votes
17y1. 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!
211 Replies
- Real Estate Investor · OH · Member since 2011 · 41 posts · 31 votes15y
Not necessarily top five but very important:
Know your state landlord/tenant laws better than your tenants.
Make sure you have adequate (and then some) liability insurance.
Maintain proper legal holding entities.
Don't try to go it alone. Network with local landlord association.
- Investor · Cary, NC · Member since 2010 · 74 posts · 9 votes15y
My list would include the items posted here, plus this one more. By far the biggest mistake I've made (and it's not close to any other mistake, and there are many) is this one:
NOT STARTING EARLIER IN MY LIFE!
Oh, if I could have, would have, should have bought and held a few properties a lot earlier.
As they say, better late than never.
Regards,
Doug - Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes15y
Originally posted by Justin Morgan:
-Choosing the first tenants that is "willing to pay" only to realize they really can't afford.This is a good one. I have seen this play out second hand. Especially when the rent being asked is well above market. The future deadbeat tenant won't blink an eye and just agree to pay it. The future reliable tenant will negotiate a more reasonable price. I assume the reasoning is that deadbeat tenants are terrible at managing their finances and overpaying is just a symptom of this.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
Great thread!
I tend to think inadequate cash reserves is a root cause of many of the problems too.
- Orlando, FL · Member since 2009 · 2k+ posts · 282 votes15y
Overestimating what you can get for rent when making your offer. Based on a few other houses in the neighborhood. I thought I would be able to get $1100/mo. and I ended up having to rent it for $900.
- Orlando, FL · Member since 2009 · 2k+ posts · 282 votes15y
Originally posted by Robin Grimes:
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.
Great post! I learned this when some people who had seen the house called & begged me to "hold it for them just one day". They were supposed to come the next day and fill out the app and never showed.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
Nothing hacks me off more than having to flush these "low flow" toilets 4-5 times to get the stupid thing to work properly.
- Rental Property Investor · Powell, OH · Member since 2009 · 27 posts · 10 votes15y
Michael Rossi summed it up pretty good. A big one for me is that this is a business and you MUST be prepared to be demanding and firm but fair with your tenants. Patience is also critical. I would rather take 2 months to find the right tenant, rather than just finding a warm body to fill the property. Because that warm body will soon turn cold and a nice eviction will follow.
- Residential Landlord · Inverness, FL · Member since 2011 · 3 posts · 2 votes15y
Costly mistake no.1:
go for quick-fix repairs/remodeling instead of investing in a repair that will last. That's a good way to save money in the long run.Examples:
- Lay tile instead of carpet. Carpets get destroyed quickly, tile floors last for ever.
- window treatments: Use verticals instead of cheaper mini-blinds. Verticals can be fixed easily, mini-blinds need to constantly be replaced.Also, invest in maintenance for high cost items, such as heater/AC, appliances and so on. It's cheaper to keep them in good repair than to replace them!
- Real Estate Consultant · Fredericksburg, VA · Member since 2011 · 11 posts · 1 vote15y
I agree with what was said about not checking on your properties regularly.
You can't leave it up to the property management company (if you hire one) and you can't possibly know what the home looks like (inside or out) if you aren't scheduling regular visits.
Trust me, I'm living next door to a great example of renters not taking care of a home.
I even live in an HOA and it still looks like a**
No one has your back but you!
- Real Estate Investor · Oklahoma City, OK · Member since 2011 · 3 posts · 0 votes14y
Ha. I just came across this forum when I was writing a guest post for a blog [AD LINK REMOVED]
I agree with Chad about being patient. Waiting for the right people may be a bit hard sometimes, but in the long run, it's worth it because whether they're good or bad tenants, in agreeing for them to rent, we are establishing a business relationship that could last months, or even years. Better to have a good tenant, with fewer headaches. - Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes14y
This could be "wrapped" up in the "value of time" by Harrison. But I think it's a tragic mistake (if you manage your own properties) to NOT budget 8-10% for management, even if paid to yourself. What's left over AFTER this deduction is what you would use as the "return on your money" or COC. This is the ONLY way you can really compare putting your money into realestate vs. a passive investment like mutual fund, stocks, cd, bonds, etc. This dedcution of "self pd" mgmt. fee "removes" the part of your return that you have to work for. the end result is that you're left with just the part of your return your MONEY works for. I could've said this with less words .... where's my editor??
- Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes14y
Oh! I've got another one. Not sure if it will make the top 5 or not, and I'm not sure what to call it but here goes....
I tend to prefer "all out" when I'm doing something. In other words, if I'm assembling a RE portfolio, and I have enough money (which I do), I prefer to search for, look at, put under contract, inspect, close on, and rehab as many buildings at once, and one after the other, as possible until I collapse. I tend to have a hard time shifting gears. I want full steam or nothing. This CAN be a mistake because once the allocated funds are used up and you have to wait, a deal could come along MUCH better than the ones you spent hours and hours tracking down. I am doing my best now to just wait. I've got 43 units. We're selling our SFHs, and now just waiting and looking out for the next "retiree" for the business that wants to dump 10-15 units for 20k a unit.
- 14yZach SikesBusiness MemberResidential Real Estate Broker · Edmond, OK · Member since 2011 · 452 posts · 183 votes
We are currently trying to rent out our first one. This helps a lot guys. Thanks for all the info.
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Homestead & Co4.9172 Reviews - Riverside, CA · Member since 2010 · 92 posts · 28 votes14y
1. Inproper tenant screening: ignoring the red flags and character.
2. Lack of management skills "big one": later blaming it on the "bad" tenant
3. Tenant must be a "fit" to the property AND your personality, not just look good on paper.
3. Improper/incomplete paperwork: 1 page lease is ok, IF used with a 3 page addendum!
5. Using same dollar amount for deposit as rent or not collecting deposit or pet fees.
- Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes14y
Financing for 30 years if you can make payments on a 15 yr. I refinanced when rates got so low because I also read that the real estate investor I admire most in town finances his investment properties for 15. I just assumed 30 was best as the depreciation schedule matched better--1st property. I guess the real rule here is to buy right, which is positive cash flow with a 15 yr mortgage. Mine just barely cash flow but have half the PI payment going to principle. Free and clear by age 67! (That actually seems like a long time to take to make a buck.)
- Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes14y
Since the title is Top 5 mistakes made by landlords, I am taking financing out of the equation. I will assume the property was purchased correctly and now we are dealing specifically with management (or lack thereof) issues:
1. Renting to family or friends.
This is the biggest mistake I see in the business. I don't know how many properties I have purchased from people who didn't want to kick out Jr. because he hadn't paid rent in the last 10 years. (I have one in escrow now and sis hasn't paid her $250 rent, on a $1,200 rental in the last 15 years.)2. Treating your tenants like friends and/or commingling tenants and relationships.
This goes right along with #1. Being a landlord is being in the people management business. Being friends with your tenants shows them you are weak. They will attempt to take advantage of you. Our philosophy; Rule with an iron fist and a smile! Treat them fairly, but if the rent is late, it is time to start thinking about moving to another place. I know a few landlords who have started relationships with their tenants. Hands down, they all agree this is the biggest mistake they have made.3. Not raising rents for fear of tenants contacting you.
When I contact a private seller of rental property I always ask three question;
1. How much is the rent?
2. How long have your tenants lived in the property?
3. When is the last time you have been inside?
When the rent is way under market, I bet you can already guess the answer to the next two question! The #1 reason landlords don't raise rents is because they don't want to deal with their tenants. They keep the rents low in hopes the tenant will not contact them about the property needing repairs. What ultimately happens however, is that the property slowly starts to fall apart. The landlord won't raise the rent for fear of the tenant complaining about things that need work or moving out. The tenant won't contact the landlord about things that need work for fear of having the rent raised.4. Not inspecting your properties annually.
Not inspecting your properties leads to them accumulating massive deferred maintenance or shabby repair work by the tenant. All the money the landlord thinks he is saving every year by not fixing things or having his handy tenant fix them compounds annually and the repair bill becomes so high they end up selling the property for pennies on the dollar to investors.5. Unnecessarily paying utilities for your tenants.
I don't pay any utility for any of my properties. I look at this as subsidizing my tenants lifestyle at the expense of my financial freedom. If they can't afford to pay their own utilities, they can't afford to rent from me. Even with our housing clients, they all pay their own utilities. If you are giving away free gas, electricity, trash pick up, or water, I highly encourage you to send out notices today, that your tenants will be required to switch service into their own name. - Mobile Home Investor · Spanaway, WA · Member since 2008 · 1k+ posts · 578 votes14y
Here are some more for the list:
1. Poor screening up front. This will cost you a lot.
2. Accepting work from tenants for rent. Later you have to pay a professional to fix the screwed up workmanship. Better to do it right the first time. Same goes for hiring tenants for repairs or maintenance work.
3. Security deposits: Handling wrong, not returning in a timely manner. Not accounting for it properly.
4. Self-help evictions: Taking the front door off of the hinges and turning off all the utilities does not work very well for a landlord.
5. Not doing your paperwork right. May have to start the eviction process all over again.
6. Illegally or incorrectly disposing of tenant property. They may come back looking for that diamond ring and mink coat they left and just now remembered. - Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes14y
First post here, glad I found this forum, very insightful.
My list of top 5 mistakes:
Along with improper tenant screening and not having enough emergency funding, others I didn't see mentioned here (may have missed) are:
1. If you need to use property management, take time to find the right property management and Do Not hire one manager, even if she has a small team behind her and good references. Tenants were paying on time, but she wasn't paying me, sometimes three months in arrears. You need a management company, even if it's a little more costly, so others can take care of your issues if your manager has bills or troubled teenagers you don't know about.
2. Raising rent on a good tenant can be a huge mistake, worse than not charging enough, in my opinion. First thing I learned, through watching a friend. He lost a great tenant who was there for over 2 years because he wanted $25 more a month, and turned out she was on a fixed income (which he knew), so she moved, house sat vacant, next tenant required eviction (judgment, never recovered), next ones had the police there constantly. I make keeping good tenants who pay on time a priority over trying to maximize rents.
3. Location, location, location. It is much easier being a landlord in a decent neighborhood and good rental market that has plenty of demand to pick and choose good tenants. Townhouse next to mine rented to 15 or 20 people after owner moved out of state, causing trouble but police wouldn't help as they only had 2 cars parked out front so couldn't prove high occupancy. By the time I found the owner, months later, they had caused my tenants to move out, and cost him over $20,000 in damage to his property. I sold that unit and am now much more careful about the neighborhoods I choose. Never thought it wasn't just about my tenants or my house causing me problems, and very happy I learned that lesson early on without it costing me too much money. Even in "good" neighborhoods, I make it a point to talk to neighbors before buying a property, and am learning to love HOAs, even if they do not like me for renting it out instead of owner/occupy.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes14y
Originally posted by Marian Smith:
Financing for 30 years if you can make payments on a 15 yr.This one is incorrect IMO. I would, in fact, argue just the opposite and that a 15-year is a mistake. The 30-year buys you a lower payment for a nominally higher rate with a normal yield curve. If you want to pay the 30-year off in 15 years simply pay more each month.
- Real Estate Investor · Virginia, DC &, MD · Member since 2008 · 261 posts · 71 votes14y
Originally posted by Bryan Hancock:
Nothing hacks me off more than having to flush these "low flow" toilets 4-5 times to get the stupid thing to work properly.Don't you mean...."Nothing pisses me off more than having to flush...."
- Real Estate Investor · Boise, ID · Member since 2011 · 49 posts · 11 votes14y
1. Screening Tenants properly and throughly.
2. Quarterly Property Inspections / Maintenance ( I ensure that I change the HVAC filters every quarter. This gives me the opportunity to conduct an inspection of the property, see what they are doing or not doing and ensure the HVAC does not get destroyed.) Costs me less than $5 a quarter. If something is wrong with the property, dog digging a hole, oil stains by a car, cleanliness, additional squatters, etc. I bring it up it immediately and I expect it resolved prior to my next visit. The fact that they know I will be by once a quarter encourages them to keep a clean home.
3. Paying too much for the property. (Includes not knowing all of the expenses or the true costs of them.)
4. Not charging tenants for late fees and clean-up of the property.
5. Having a reasonable expectation of what the wear and tear that a tenant(s) will do to a property. Holes for hanging stuff, wear on carpet, dead grass from sprinklers that stopped working, water damage.6.. I continue to advertise my properties until I have deposit, lease, all background checks / screening done and rent in hand. Too many times everyone wants to have options. By continuing to advertise it makes a perspective tenant motivated to close the deal.
- Real Estate Investor · Hartford, CT · Member since 2011 · 222 posts · 17 votes14y
WOW! I'm a new investor and this pot was super informative!
It crazy because it's like we all dealt with or will deal with the same kind of tenants!!
LOL
Geoff Murphy
- Indianapolis, IN · Member since 2008 · 244 posts · 36 votes14y
Not filing eviction quick enough for non payment, destruction of property or etc. I put in my lease that eviction will be filed by the 5th of the month if rent is not paid. I follow through with the filing and tenant pays rent before court date or has to move 72 hours after court date. No free lunch or (no free 30 days) here.
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