Are you a new landlord? Do you know some of the most common mistakes new landlords make?
Perhaps you have an investment property or maybe you are looking to purchase real estate to bolster your portfolio. It may seem like a good time to purchase a rental property while interest rates are at the lowest they have been in decades, but being a landlord is not as easy as it may seem and there are some costly mistakes new landlords make if he/she does not prepare themselves to avoid the common pitfalls that go along with the investment opportunity. To assist you in your investment endeavors we have listed 10 common mistakes and how to avoid them:
1. Not Running Credit/Background Checks
If you are not running credit and background checks, you need to; you never really know if a person is representing all they are to you without a non-biased report. Look for any negative trends in the credit history. Verifying employment is also recommended, obtain a copy of their most recent pay stub or other income verification from an outside source. Have a verification release signed by the potential renter to obtain information from employers and past landlords and then follow up on sources for accuracy.
2. Not Counting on Vacancies
There usually is a gap in time between the date a renter moves-out and stops paying rent and the time a new renter is found and starts paying rent. Set up a savings account to cover expenses for up to 3 months. While you are at it, establish a maintenance account for ongoing recurring items such as leaky faucets or toilets.
3. No Written Rental Agreement or Lease
The days of “My word is my bond” and handshake deals are a thing of the past. Rental agreements and leases are legally binding agreements that create a contract and define the terms or understandings of each party. Without a legal “contract” you will have a hard time enforcing terms or ending tenancy should you need to go to court. Make sure you are using a document that is compliant with your state laws.
4. Not Inspecting or Neglecting the Property
The property that you are renting-out is your responsibility. You are required to maintain the interior and exterior of the property and good renters expect to move into a clean, well-maintained property. By ensuring the property is “market ready” (meaning, the property is maintained to the level that you would move into it) before you secure a renter, you can ensure the renter is happier and you have to deal with fewer phone calls. As the owner of a rental property, you are required to make sure that your property meets local and state health and safety standards.
5. Delaying Legal Actions/Evictions
Delaying legal action or the eviction process when renters default on their lease obligations (including not paying rent) can be very costly. File necessary legal actions timely to help mitigate lost income and potential damage to your property.
6. Not Keeping Up on the Rental Market/Not Raising Rents
Most rental owners simply look in the newspaper to see what other owners are renting their property for and determining a rental amount and many are just happy to have their mortgage covered. Do your research and due diligence to ensure your rental rate is appropriate for your area. If you already have your property rented, but do not increase the rent upon renewal, you are not managing your investment effectively. Thinking that the renter will move or that you do not have enough time to re-rent the property are common fears, however, those fears do not make you any more money. Renters do not expect rents will never go up and in-fact many expect a modest increase each year.
7. Not Giving Your New/Renewing Renters a Lead-Based Paint Disclosure
For most rental property owners and as of December 6, 1996, the Lead-Based Paint Disclosure law went into effect. According to the law, every owner with a property built prior to 1978 must give all new and renewing renters a disclosure and pamphlet on lead paint. Failure to do so could result in a $10,000 fine.
8. Not Having the Proper Insurance Policy
Many landlords feel their homeowners’ policy covers them adequately, this simply is not true. Many of these policies become void if you are no longer the occupant of the home. Check with your agent and let them know you are renting the property to ensure you have proper coverage.
9. Not Factoring in the Value of Your Time
Unless you are a full-time real estate investor, odds are your primary job is not being a landlord. But now that you are a landlord, you are probably spending several hours a month dealing with your rental, especially during a lease turnover. One big mistake new landlords make is not valuing their time. Ask yourself, “What is my time worth?”, do a little math and then determine if you are still getting a return on your investment. If not, you may want to think about what you can do to ensure your rental property is working for you instead of the opposite.
Related: The New Landlord Calculator
Do the math and find out what your time is worth, how much time and money you are actually putting into your rental property and how your time commitment compares to other landlords. Check it out here!
10. Not Accounting for the Learning Curve
Finally, a common mistake new landlords make is becoming a landlord without accounting for the learning curve. Not accounting for your lack of experience can cost your long-term. You should either get great advice from experienced landlords or consult with professionals such as attorneys with experience in landlord/tenant and investment property laws and a licensed property manager to ensure you are covering your bases and not dealing with unnecessary risk with your investment property.