What are the big risks and pitfalls facing new landlords?
Owning rental property is great. A buy and hold strategy has many benefits, and the passive income it can provide can certainly put individuals right where they want to be for retiring. Of course, there can be a significant learning curve. That can leave new real estate investors and landlords exposed to risk. So what are the most common factors that trip them up and threaten financial disaster? How can you beat them?
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The Top 4 Profit Killers for New Landlords
Taking Too Long To Get Units Rent-Ready
Taking too long to go from acquisition to bringing in income can be disastrous. You don’t want to go broke before you’ve even landed your first tenant. It is mind-blowing to see some new landlords take months and months to renovate a new acquisition and get a tenant in. Others seem to manage it in just days.
You should make repairs right and do a quality job. No question about it. But every day is money. Even without loan payments, you are accruing property taxes and insurance, and your ROI is declining while you are missing out on tenants. If you’re in a Midwest market that has rough winters, this is especially critical when those months are coming up.
Allowing Extended Vacancy
The same risks as above also apply to extended vacancy periods while you own the property. This can happen any time you turn tenants (which is why savvy landlords treasure long term tenants). This loss of income and extra risk of exposure to damage, vandalism, and squatters during vacant periods may seem palatable if you have just one unit. Wait till you have 10 (or 100) sitting empty. Experienced landlords leverage the best technology and systems to hone in and make sure rental units are rent-ready again in just a few days. They also make sure they have a constant pipeline of renters — and often a waiting list — so there are as close to zero down days as possible.
Failing to Verify What You Can Rent for in Advance
Never, never, ever just take someone’s word for what a rental may rent for. Never. Not the seller and not the listing agent. Always do your own due diligence. Don’t look at asking rents. For vacant units, pull comps in the neighborhood, talk to people, run ads, and test the market. For example, if there is a similar house to yours with an asking rent of $850 and it has been on the market for 4 months, then chances are that is not what the market is willing to pay. Price accordingly. The market will always let you know whether you are priced too high or too low.
Over-Rehabbing the Property
Over-improvements will bankrupt you and will put you in a negative equity position. Please avoid it. Make your units nice, but don’t overdo it and rehab the property to attract a $1,500 a month tenant when no one in the neighborhood is paying more than $800 per month.
Watch out for these pitfalls and you’ll be well ahead of the curve.
Landlords: Have you experienced any of the above? Would you add anything to this list?
Let me know your thoughts with a comment!