Are you a new investor or landlord who has purchased your first rental property? This read is for you! We have compiled a list of the 8 most common missteps rookie landlords make to help you prevent expensive slips and save you many headaches.
1) Overextending Finances
We have seen it many times; in the current real estate market it is easy to overpay for a property. Eager property investors can easily pay more for a property than the feasible monthly rent can generate in return or that the property is even worth if they do not do their research in advance. Often times new investors do not know what market rent would be for a property when purchasing and therefore may miscalculate their budget when searching for the right rental property.
It is important that if you are not generating enough monthly rent to cover your mortgage, property taxes, insurance, repairs, and other expenses, that you have money set aside to cover these costs. Prepare yourself financially for a surprise vacancy, delinquent tenant, or if a major repair is necessary. We typically suggest to leave yourself at least 3 month’s rent aside to cover any unforeseen costs during the tenancy. Leaving yourself without this buffer puts you at risk of not being able to make the mortgage payment if an unforeseen expense does arise and could be dangerous going forward.
2) Listing the Rental Vacancy Off-Season
When you are searching for your perfect rental property, the timing is also important. In the rental market in general, there are peek rental seasons and off-peek seasons. Typically, we suggest to avoid a tenancy beginning December or January as this is an extremely slow period in the rental market with the holidays set around this time and you take a risk of having your property sit vacant for a number of months. In most rental markets, peek season is set in the summer months (May-September) which would make the ideal closing day on a new property late spring to allow yourself time to attract the widest breadth of tenants.
3) Not Screening Applicants
Once you have purchased your investment property, the next step is to find tenants to rent the unit(s). Rookie landlords tend to not know what to screen for when filtering through applications for vacancies. If you do not screen the potential tenants properly, you risk accepting a tenant with payment history issues, risk of unemployment, or possibly an illegal tenancy all together.
Make sure you have a strong application put in place for potential tenants to complete. We suggest screening applicants for proof of employment/income, landlord reference check, credit history check and identification confirmation. Take all of these items into consideration when making your decision to ensure you select a qualified tenant for your rental.
4) Not Preparing a Lease
All too many times we have seen an investor come to us without a lease agreement in place. This is probably the biggest mistake you could possibly make as a landlord. It is important to have a professional lease agreement that has been signed by both the tenant and the landlord to set out the term of tenancy, monthly rent rate and terms/conditions for the tenants & the landlord. The lease is a binding legal document, it is important to make sure you have this set in place and that each party has a copy for their records.
5) Being Too Lenient
“My car broke down and I didn’t have a way to get to you”, “My son is sick today, I can come in another day to pay”, “I don’t have the money right now but I get paid next week”. Seasoned landlords can often times see through these excuses, especially when there is a new excuse every month, but rookie landlords may give in to these tenants and allow an extension on the rent payment without issuing any legal notices to back them up in case the tenant doesn’t pay. That being said, situations do come up and a tenant may miss a payment. We suggest cutting the tenant some slack if that tenant has already proven him or herself as a trustworthy tenant. However, if a rookie landlord is too lenient early on in the tenancy, this can set the expectation that you are flexible in the future and your tenant may take advantage of this by paying late regularly going forward.
6) Inadequate Insurance
Many new landlords may believe that regular homeowner’s insurance will be sufficient coverage. That is not the case. If you continue with the standard homeowner’s insurance and the insurance agency finds out that you have been operating the unit as a rental property, they will not cover you if you need to submit a claim. To protect your financial interests, you need to obtain landlord insurance and ensure you have adequate coverage.
7) Lack of Inspections & Photos
Inspections are the number one method to ensure the property is being well maintained and protecting your investment. Tenants will complain about issues that are inconvenient to them (for example, a plumbing leak or the dryer not operating correct) but you cannot rely on them to notify you if there is a crack in the concreate foundation or the gutters need to be cleared out or other upkeep issues that they may not consider necessary.
Conducting regular inspections is highly recommended. This will allow you to address any maintenance items that the tenant may not have caught, check on the state of the property and address any cleanliness or damage concerns you have at that time. It is highly recommended to take photos at the time of your inspection and to keep these on file. This will allow you to refer to these photos in case there is ever a question about damage or unit condition at your next inspection or at turnover and you will have the sufficient documentation to hold the tenant responsible for these damages.
8) Reluctant to Spend Money
If you are an investor and not prepared to invest back into your property, this can be a huge mistake. It is inevitable, there are going to be repairs that are required with a rental property — or any property for that matter. Rookie investors may think they can get away with not repairing certain items in their rental property when something breaks down. You should always repair maintenance items in a timely manner from being notified or noticing the issue. This can prevent bigger issues down the line and help you save money in the long run. The small leak in the roof may not seem like a priority right now, but the next time it rains this small leak may turn into a larger leak and begin to damage the walls or the flooring in your property, ending up costing you double or triple what the original repair may have cost.
Another mistake that rookie landlords will make is hiring a contractor based on the price they quote you rather than the quality of work or experience in the industry. It is always worth hiring a contractor who will do the job correctly rather than to hire someone who is less expensive but will do a mediocre with cheap materials or perform quick fixes, causing you to have to pay to redo the work in a few months or a year. Continuing to invest in your property will help you protect the property value and could even increase the value of your investment for the future.
Some rookie landlords may be over their heads and reluctant to spend the money to hire a professional property management company to manage the rental on their behalf, thinking they can do the work themselves and save the money. We can assure you that if you find yourself not having the time to manage the unit correctly or to learn the rental market in the area, this money will be well-spent on hiring a professional and can save you many headaches in the day to day operations of your investment(s). This could be the smartest decision you make to protect your investment.