Most landlords spend all their time dealing with tenant complaints, city inspections, putting out fires (hopefully not literally!), shuffling tons of paperwork and a slew of urgent matters.
There’s also an incredibly tedious side to property management that many never find the time to address. It’s tedious, but it’s absolutely no less critical to the job than averting disaster and discerning bad apples. Let’s call it Financial Management, and it should be no surprise to anyone that it’s very easy to ignore it, which can eventually lead to financial ruin. Many landlords are so buried in the day-to-day struggle of property management that they don’t even know if they’re really making money or slowly sinking.
Let’s look at some common mistakes that affect proper Financial Management.
Download Your FREE Tenant Screening Guide!
Hey there! Screening tenants can be a tricky business, and this critical step can be the difference between profits and disaster. To help you with your real estate investing journey, feel free to download BiggerPockets’ complimentary Tenant Screening Guide and get the information you need to find great tenants.
6 Common Mistakes Landlords Make When Budgeting & Monitoring P&L
Not Keeping Meticulous Records
Record-keeping is one of the most annoying and necessary parts of watching your costs. Every penny collected or spent affects your bottom line. The challenge is tracking your income and expenses such that you can use the data to know where you are financially now and can budget for the future.
It seems a lot of landlords mix security deposit funds with tenant rent payments and use the deposits to run their business. We’ve been hired by DIY landlords who didn’t have the liquidity to transfer the proper security deposits amounts to us because they had spent the funds. Even scarier, we’ve encountered the same problem when taking over properties from competitors. If you have to use security deposits to stay afloat, something is wrong somewhere. Do you really know where the problem is and do you have a solution?
Not Having A Budget
It’s amazing how many landlords create spreadsheets with all kinds of numbers when buying a property, but then “wing it” thereafter. Landlords get frustrated with tenants who live paycheck-to-paycheck, but actually do no better themselves. It can be difficult to create a budget when you initially purchase a property, as there are all kinds of surprise expenses and events. After that first year, though, you should have enough data to put together a budget going forward.
Just Copying Last Year’s Budget
Last year’s budget is a decent place to start this year’s budget from — but every year is different. You probably had some expenses last year that you won’t have this year, and there are probably some projects you intend to do this year that weren’t on the table last year. Copying the format of a previous budget isn’t a bad starting place, but don’t ever just blindly assume that the same numbers and the same assumptions are going to serve you as well this year as they did last year.
Lacking Profit & Loss Statements
Most landlords think they know how much they’re making or losing on their properties, but really don’t know until they do their taxes and look at their Schedule E. A business that only looks at their P&L once a year usually doesn’t last long, as they can’t see a problem to fix it until it may be too late. Even if you keep meticulous records and have a budget, they’re useless unless you have a system in place that can generate at least a quarterly P&L statement so you know where you are financially.
Not Reviewing Your Expenses
Building a relationship with a vendor — like a plumber, electrician, handyman and so on — is generally a good idea for any business that intends to stay in business. At the same time, powerful market forces encourage competition between vendors, and sometimes switching can save you an impressive amount of money. Putting in the work to review your options once a year can be well worth your while. The same goes for professional services like attorneys and accountants. Lastly, don’t forget supply expenses like printer ink and paper. We saved a decent amount of money when we switched from buying new ink cartridges to refilled ones.
Thanks for sticking with us for all of these posts; it’s been a fun little jaunt down Colossal Screwup Boulevard. Hopefully you’ve learned about a few things that you should be keeping in mind — and hopefully you won’t make any of these mistakes going forward.
Good luck! Readers: What would you add to my list of common landlording mistakes?
Don’t forget to leave your stories, tips and commentary below!