My Biggest Landlord Mistakes Over 20 Years as a Buy-and-Hold Investor

My parents and grandparents all had rental properties, and so it was a very natural transition when I went into real estate myself. I bought my first property after college, when I started working as an engineer, launching rockets at the Kennedy Space Center. Fast forward twenty years later, I now own 27 rental properties, and I am part-owner of a 300-unit apartment building.

Even though I had learned quite a bit from watching my parents be landlords, I’ve learned many lessons the hard way throughout the years. I’m still learning today, from real estate investors I’ve known for years, from my kids, and even from other folks here on Bigger Pockets.

That said, I’d love to share what I’ve learned in hopes that it helps others. After all, it is best to learn from others’ mistakes whenever possible, instead of your own.

My 3 Biggest Landlord Mistakes

1. Ignoring Tenant Warning Signs

As landlords, we all dread the possibility of bringing in a tenant who is an absolute nightmare. Usually, this happens when we speed through or even cut corners in our vetting process. I learned this lesson early on, but it is still one of my biggest mistakes.

For example, I had a vacancy in one of my properties, and I was starting to get anxious. It took a month to paint it, clean it, re-carpet it, and I was now a few weeks into the next month. Someone came along who wanted to move in as soon as possible, and he had the security deposit, as well as first and last months’ rent, in cash. He didn’t try to negotiate rent down either. It felt like a godsend, so I said yes and let him move in the next day.

I then find out that he’s a complete slob, and he was evicted from his last rental. The reason he has cash is because he wasn’t paying his landlord for the last six months. He started running up the water and electric bills, not paying those, and then he stopped paying rent too.

My energy is drained trying to talk to him and I started the legal process. Meanwhile, he was screwing up the new carpet that I just put in and not taking care of the place. Because he wasn’t paying any utilities, they shut off the water and electricity, so he proceeded to use the toilet even though it wouldn’t flush and lit candles throughout the property, letting wax melt all over the floors and carpet.

The eviction process varies by state, but in Florida, where many of my rentals are, it took about eight months before I got him out of there. I shelled out money to cover the eviction, legal fees, reporting, fixing the place up, etc., not to mention the lost income over that time period.

I could have avoided all of this if I had done the proper due diligence on my potential renter (for example, I didn’t run his credit or get documentation showing his rental history and ability to pay) I was in a rush and it wasn’t as fast to get background results as it is today.

In scenarios such as the one above, what should I have looked out for?

First off, a big warning sign is if they want to move in right away. This would rush the process, and their motives may be unclear. It may mean that they’ve been evicted and need somewhere to live ASAP. It’s much better to have a waiting list and vet those people, because you really want someone in there who is planning ahead.

If they want to pay in cash and say that money is not an object, it might really mean that they have no intention to pay and they have cash right now because they screwed over their last landlord.

The lesson here is to develop your processes before doing a deal and stick to them.

2. Hiring the Wrong Property Manager

Hiring the right property manager has its perks. They can save you time and money by following through with your processes and getting discounted pricing from vendors.

But when/if you do hire a property manager, make sure that it is his/her main business. I learned through experience that if you hire someone who’s managing their own properties and many of them, they will likely make those properties their top priority. Your properties will simply be backfill.

To avoid this situation, ask them how many properties they manage for others and make sure to get references from other real estate investors they work with. When hiring anyone, especially a property manager, talk to several and then negotiate pricing with the best option.

Most property managers cost between 5-10% of the rent, dependent on the duties and your contract, not including maintenance. If you can afford it, I think it makes sense to hire a property manager straight from the beginning, especially if you can utilize your skill set to make more money elsewhere. For example, instead of doing repairs, I use that time to find and evaluate new deals.

That said, if an investor would otherwise spend their time doing drugs or drinking booze, then maybe they should go change the water heater instead. Or, if you enjoy doing the repairs, then by all means, go for it.

3. Sticking to my “Buy-and-Hold” Strategy

Over the last twenty years, I’ve focused on one main goal while building my real estate portfolio: to cash flow and enjoy financial freedom and work less. My main method for attaining that cash flow was through buy-and-hold real estate.

I have only sold a few properties, and the only reason I sold was to end a partnership or make an insane profit.

More recently, I was talking with my children, who recommended that I more seriously consider other exit strategies. For example, they asked why I never sold properties at the appropriate time in the market cycle.

This is something that I haven’t focused on and would like to investigate further as I review the economic cycles I have seen in my life.

After further discussions with my sons and others, it makes sense to sell in the cycle when it’s high and buy properties back when it’s low. For example, in 2007, I was offered a million dollars for one of my commercial buildings. It was cash flowing nicely, and it would have been a nice profit. I looked at the cash flow I would be missing out on, and I decided not to sell. 2008/09 happened and my tenants closed up shop. The building was eventually vacant in the downturn, and there were no buyers in sight. It was definitely an eye opener, and now I am looking at the cycles and will be selling some properties on the highs and buying in the downturn. Nothing goes up forever.

If you’re looking to make cash flow through buy-and-hold rental properties, just make sure you are prepared for other exit strategies should the opportunity or need arise.

Other mistakes

There are two ends of the spectrum for landlording. There are the “mom and pop shops,” i.e. investors who manage all of their own properties and know every tenant by name. They build a relationship with those tenants. If the tenant loses their job, they know that before the rent doesn’t show up and can even try to help the tenant find work. This is wonderful and certainly beneficial for the community, but the model is difficult to scale. I have great friends, Don and Ester, that worked this way for 60 years, and still today in their 80s, they love the empire they built.

The other end of the spectrum are the larger operations, where the investor may not live nearby and everything is completed through property management companies. Everything is process-driven and less personal, but this enables the investor to focus on other things. Management of the portfolio is more passive and requires a lower time commitment.

You get to choose where you want to be on this spectrum, of course, based on your own preferences. However, one of the mistakes that I see landlords make is treating their real estate investing as a hobby instead of a business. Even if you want to keep your portfolio small and offer a very personalized experience, you still need to be adamant about developing processes, using technology, and completing necessary paperwork. For example, if you don’t do the accounting properly, you can get in trouble with the IRS or end up paying more in taxes. Plus, you may have trouble getting a loan from the bank if you don’t have the correct and accurate reporting.

I’m sure I have a few more bizarre stories to share about being a landlord, but I’d like to get the conversation flowing for investors of all levels. What mistakes have you learned from? Better yet, what are you still learning today?