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!
So many solid answers here! The one I see so often is during tenant screening, when property managers/landlords do not contact the last two landlords for references. When my renters move on, I rarely get calls from their new perspective property managers/landlords. That always surprises me.
Ditto that! I always gain more insight about a prospective renter by talking to as many contacts from their past as possible. Not only landlord references, but also personal references. Some landlords and personal references are surprisingly honest and informative.
What is this a train wreck? This is the worst question I have ever heard. Why would anybody want to know the 5 worst mistakes. I can tell you 1,000 mistakes and you know 1,000 things that don't work and have no idea how to do it correctly. What you need to know is how do I do this correctly.
What is this a train wreck? This is the worst question I have ever heard. Why would anybody want to know the 5 worst mistakes. I can tell you 1,000 mistakes and you know 1,000 things that don't work and have no idea how to do it correctly. What you need to know is how do I do this correctly.
Didn't read the thread, huh? A smart person learns from their mistakes, but a wise person learns from the mistakes of others. ;)
I have enjoyed the education.
What is this a train wreck? This is the worst question I have ever heard. Why would anybody want to know the 5 worst mistakes. I can tell you 1,000 mistakes and you know 1,000 things that don't work and have no idea how to do it correctly. What you need to know is how do I do this correctly.
Didn't read the thread, huh? A smart person learns from their mistakes, but a wise person learns from the mistakes of others. ;)
I have enjoyed the education.
@Don Griffith
No you learn from other's successes. The phrase that says that you learn from other's mistakes is a truism that is common sense. I have a problem with common sense also because if common sense was right then success would be common. What I am trying to do is teach everybody that you need to use your brain not embrace comfort sayings. I don't want to know any mistakes they don't teach you anything but gossip and spread fear.
You should never be comfortable with anything except success, don't talk about, don't embrace, and don't condone anything but success.
When you look at volume (how many people are in the total population of people to interview) all it takes to run an article on 5 biggest mistakes for anything (real estate, relationships, swimming the English channel) all you need is a journalist that who may not even be able to spell the subject and people willing to quote a list of mistakes. There are thousands of people that bought a rent house that blew up in their face to quote. Now if you say tell me how to successfully do anything real estate included you have to find someone that has done it correctly and get them to tell you how they did it. That is a lot more difficult. You have to find a person that has been successful, then qualify that person and the person they know what they are doing and why they are doing it.
Whenever I see an article on 5 biggest mistakes what I see is a lazy journalist.
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!
I am managing a property where this exact thing happened. Previous tenant tore the place up, investor did not want to do repairs was more worried about lost rent. I do not think they screened properly either. (Only been working with them since May.) Now they are looking at the new resident of two years doing the exact same thing. She's allowed a water leak to go for over year without reporting it, now there is extensive water and mold damage. Thank goodness they allowed me to call in a plumber to fix the spigot (it only took two months to get approval.) I am trying to train these folks so they don't lose their property. It's almost $500 below market rent. What a mess and I get to clean up! I earn every penny of the $50/month they pay me to manage this place.
Screen, screen and did I mention screen your residents. The same way every time, no exceptions to the rules. It's doesn't matter if it's your brother's best friends cousin. Screen them. They need to meet the same criteria you hold your other residents too. Never deviate or you open yourself up for discrimination lawsuits, particularly in multi family situations.
@Angie Swader $50 is not enough to put up with that. You should charge a service fee every time you have to clean or have something repaired. Or up your monthly fee. I'm assuming you fully manage that place?
Just wondering if that sounds reasonable.
@Cliff Odom Although I agree that you should learn to do things right, first, you still need to learn what NOT to do.
In project management, you always learn what NOT to do as "lessons learned" when the project has ended or closed, successful or not. There is value is doing this.
Success is maximizing on your strengths AND knowing your weaknesses. Real estate is so complex at times and people get lost instead of applying common sense to work through problems or issues, or just the everyday managing of your investment(s). Some people don't take the time to learn before venturing into something they have no clue, or a little of one.
When you look at volume (how many people are in the total population of people to interview) all it takes to run an article on 5 biggest mistakes for anything (real estate, relationships, swimming the English channel) all you need is a journalist that who may not even be able to spell the subject and people willing to quote a list of mistakes. There are thousands of people that bought a rent house that blew up in their face to quote. Now if you say tell me how to successfully do anything real estate included you have to find someone that has done it correctly and get them to tell you how they did it. That is a lot more difficult. You have to find a person that has been successful, then qualify that person and the person they know what they are doing and why they are doing it.
Whenever I see an article on 5 biggest mistakes what I see is a lazy journalist.
I agree here. The question is how to put together a successful rental and copy that process over and over again. I am going to list my top 5 things that will make your rental a success (simplified version) and would suggest that any non-conformity to these would open you to failure.
1. Buy the property at the right price (like most have said you need to consider all expenses and include these into your desired ROI and adjust your buy price accordingly).
2. Fix everything when you rehab it. This does not mean spending a ton on the rehab for fancy fixtures and finishes. Just make the place clean and functional. If your water heater is already 15 yrs old replace it before you put a tenant in there. 100% of the time it will break on the weekend or at night and you will have to pay extra to have it fixed or it will cause extra damage that you otherwise would have avoided. Also, if you have an old AC unit and the summer rolls around the tenant will start blaming you for the high electric bills. I can't over stress this point- proper rehab will go a long way in getting better tenants, lowering your maintenance, retaining your tenants, and reducing your stress while managing the property.
3. Screen your tenants properly- don't get lazy here. Do a full credit/criminal/landlord history check and call the previous landlords. Put on your detective hat and find a reason not to rent to them. If you come up with some legitimate reasons either deny them or increase the security deposit to cover for added risk.
4. Set your boundaries early with the tenant and stick to them. I have not always followed this and it comes back to bite you. It could be laziness, neglect, or getting your feelings involved but it always costs you.
5. Build a good team. I cannot be a maintenance guy, landlord, accountant, lawyer, marketing guru, and real estate agent all the time. Sometimes if I have a low skill repair that is not an emergency I might go out and fix it if I feel like it (gives me an opportunity to look at the property) but I rely on a team of individuals I have used and can count on to get things done right and quickly.
"Failure to address problems with your rental units ASAP." I totally agree with this one. Delayed maintenance is a killer. Not only does it deter renters, forcing you to lower rent, but it reduces the value of the property. As time passes small damage or issues grow exponentially in both the time and money require to fix them. Do yourself a favor and manage your property well, your wallet will thank you.
Mine would be (in no particular order):
We did a very similar blog article to this recently.
I'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).
Owners can have a different interpretation of what good repair standards are.Many landlords are prepared to accept a prospective tenant on the basis of a self-generated reference or a reference from an existing landlord. Most of us like to see the best in folks but, as a landlord, you’re running a business and it’s essential to carry out due diligence.
Owners can have a different interpretation of what good repair standards are.Many landlords are prepared to accept a prospective tenant on the basis of a self-generated reference or a reference from an existing landlord. Most of us like to see the best in folks but, as a landlord, you’re running a business and it’s essential to carry out due diligence.
Agreed that you should never trust a "self-generated reference" always do your own independent tenant screening.
This thread is a gold mine with nearly 7.5 years of comments and advice. I read through each answer and found it extremely helpful. It did take a while to read all 145 posts so I figured I would write a cliff notes version. As I read through the comments, I paid attention to:
1) the frequency that a mistake was brought up and
2) the answers with a high number of upvotes.
I also grouped similar mistakes into the same category.
Here is what I found to be the most common "top mistakes" noted in this thread.
1. Not understanding finances / having unrealistic expectations about cash flow
- Overpaying for a property
- Setting rent improperly / not raising rent
- Underestimating operating expenses
- Inadequate cash reserves for big cash expenses i.e. a significant repair
- Not understanding the accounting side i.e. taxation, depreciation, equity, etc.
2. Poor tenant screening
- Improper screening process / criteria
- Accepting incomplete paperwork
- Not asking for proof and/or not verifying information on applications i.e calling references and obtaining tax returns, w2’s, bank statements
- Ignoring “gut feeling” and red flags on applicants
3. Not knowing how to manage tenants
- Not enforcing the terms of the lease
- Too trusting and lenient
- Not charging tenants for damage
- Not evicting fast enough
4. Not treating it a business
- Not having a business plan
- Not being professional – i.e. separate phone line, being dispassionate
- Co-mingling business and personal funds
5. Not knowing the laws in the state
- Laws vary by state; not reading up on or understanding own state’s laws.
6. Renting to friends and employees
- And losing relationships as a result.
7. Treat your rental like it’s “only a rental”
- Bare minimum effort
- Cutting corners on repairs and upkeep
- Cheap furniture and décor
- Leaving a weak flushing toilet (expect many plumbing issues)
8. Not making periodic inspections of the unit
- Being unaware of how tenants are treating the property and what maintenance is imminent
Nice Recap!
Keep your relationship between you and your tenants strictly business like. Do not attempt to develop any kind of a friendship.
So true. I get friend requests from tenants on Facebook and I reject them. I hear stories of landlords that become great friends with tenants and it is trouble waiting to happen. What happens when they don't have money for rent? I am also skeptical about people who invest with friends or relatives. I heard it put best that friendship born out of business can work, but going into business with friends rarely turns out. I am sure there are exceptions, but I don't want to risk friendships.
In my experience treat this investment like a business/career in all areas.
Not training yourself for the job; joining BP and your local REIA sets you up with a vital 24.7 resource guide.
Not making educated purchases; starts from locating the first property to ordering contractor supplies, you need to analyze the numbers and request multiple bids
Not professionalizing your landlord/tenant relationship ; establish business rules from your screening process through your move out date. These rules will establish the baseline to make decisions based on statistics and experience not your gut and your heart.
Now have the discipline, determination and grit to practice the hard work and follow your process and your passion.
“Outcomes are always a mix of chance and skill. A decision is as good as the process to arrive at it.”
Agree with a lot of issues with friends. Also family can be rough, managing for family as well as managing for others and having family as a tenant. . .
I am biased, and feel strongly the #1 mistake is not establishing rental acceptance criteria prior to vetting applicants -- which then allows for emotion in the critical phase of selecting residents. Set the criteria and accept only those that meet the criteria, and be detailed on the criteria. It's best for everyone, makes this the empirical business process that it should be, removes possibility for discrimination etc. An excellent screening process will deliver solid tenants, and then most other downstream headaches can be prevented...
I must add, being a landlord has been rewarding. The number one thing I would consider when doing a credit check is the credit score, anyone with a great score will work on keeping it Great!
My tenants were on their jobs for a short time but the credit score was so great, I selected them over the others.
I have no regrets, and I would do it again.