7 Common Mistakes First-Time Landlords Make, and How to Avoid Them

Written on January 25, 2016 by , updated on December 9, 2016

New Landlord MistakesI have owned rental property for over 10 years now and have made more mistakes than I would like to admit.

Listed below are some of the mistakes that I have made, as well as common mistakes I see other first-time landlords make.

1. Over-Estimating Rent Rates

The vast majority of landlords buy a rental property, plan on doing some renovation work and increasing rent dramatically after the renovations. Yes, you will get a higher rent rate but probably not as high as expected.

You can fix this very easily by marketing the property on Craigslist before the renovations are complete. You can judge by the response rate how in-line you are with the market. The majority of the most successful landlords I know keep their properties rented at below market rates.

Why on earth would they do this? Because honestly if you get a good renter that pays on-time and treats the property well it’s worth it. Additionally, vacancy expenses and turnover time are huge costs.

By keeping your properties at below market rent you keep your properties at 100% occupancy.

2. Not Starting the Eviction Process Immediately

Once you get a tenant that starts paying late, you need to be charging the late fee in your lease. Additionally, if they are paying so late that it is cause for eviction in your lease you need to do this.

Do not accept partial payments.

Related:

3. Not Treating it like a Business

My wife hates to hear the term “side project.” I work a lot of hours already at my full-time job. I have a wife and kids and other responsibilities. My rental property business changed dramatically when I went from 1 to 10 units.

In-fact I would highly encourage you to get to 10 doors as quick as possible. Here is why:

  • 10 doors x $800/rent x 12 months = $96,000 in annual revenue
  • Target 20% cash-flow margin = $19,200

This is substantial money and you can use this strategy to pay down your debt faster.

However, several of my friends just buy one rental property and complain about the headaches. Here’s the thing, 1 rental property is a headache because you don’t have enough revenue to justify the time and extra costs.

Using the above rent numbers with one door you would only make $9,600 in annual revenue and $1,920 in cash-flow margin.

Note, I’m defining cash-flow margin as what is left after debt service, taxes, insurance and maintenance. This margin will vary dramatically by the age of the properties.

4. Underestimating Maintenance Expenses

This has been my biggest lesson learned as a landlord. Maintenance expenses have made a property I thought was going to going be a home run into an absolute cash-drain. This issue is absolutely critical for you to understand if you plan on investing in multifamily properties.

Tenants will not take care of the property as well as you think.

Animals (especially cats) can destroy a lot more than you think. Water damage has caused me to: replace roofs, exterior walls, flooring, baseboards, floor joist, you get the idea!

5. Not Having Multiple Funding Sources

Hopefully you are trying to grow and scale your real estate business. A lot of first-time landlords go in and put 20% cash down on their investment properties. They then use additional cash to improve the property.

There is nothing wrong with this strategy. However, bankers are the one that came up with this strategy because it benefits the bank the most. Unless you have more cash than you know what to do with for the foreseeable future, this strategy is going to greatly constrain your growth.

The real estate investors that are able to grow the fastest are those with the most creative and diverse funding

I know three real estate investors that went from a net worth of basically zero dollars to having a net worth of over a million dollars in five years. They all used several different methods of financing like: equity joint ventures, private loans, hard-money loans, and bank financing just to name a couple.

Related: 3 Must-Haves for Scaling Your Real Estate Business

6. Hiring a Property Management Company

I’m sure this one is going to be controversial. However, I will be the first to admit this is only from my experience. There are several great property management companies in my area, like Memphis Invest, plus several in Hawaii that my friends use.

Related:

By hiring a property management company to handle issues you are not going to learn how to deal with the problems yourself, you are simply going to be reliant on the property managements systems and procedures.

Additionally, you would think that since the majority of them get paid as a percentage of revenue that they are very incentivized to show your property off and get it rented quickly.

I have found this to be false, and a trap for first-time landlords.

The majority of property management firms are under-staffed and focused on their larger customers.

There is no one as motivated as you to get the property rented.

Cozy provides a great set of free tools for market your property, accepting applications, running credit checks and receiving rent. All that is left to deal with is maintenance issues.

Several of my friends use Cozy and they have it in their lease that anything under $100 the tenant is responsible for. However, be cautious of charging repair deductibles for repairs that are really your responsibility.

Related: Don’t Charge a Maintenance Request Fee or Repair Deductible

Any problem over that they are directed to call a general contractor that they have a good relationship with. This simple but powerful system will completely negate the need for a property management company and more importantly make your real estate business more profitable. Just be sure to have final approval on all work done – before the contractor starts.

7. Asking Friends and Family for Advice

This is perhaps the biggest mistake I see people making. Everybody has an opinion and it seems like everybody has heard of some horrible tenant story.

Real estate has been responsible for a tremendous amount of wealth generation in the United States. No, it’s not easy but it can be worthwhile when you structure your business correctly.

I am a subscriber to Forbes magazine and every year the real estate category dominates the reason the majority of Americans are wealthy. Don’t let a negative Uncle or friend deter you from your dream of building a real estate business.

Related

There’s really no need to get advice from your broke uncle. We have an amazing community here at Landlordology. You could also subscribe to the podcast, “Ask Lucas” if you have any questions.

Summary

The real estate business is a great business. However, anytime you are getting started in something you have no experience with you are going to make some mistakes. This is true with real estate and with any other kind of business.

The key to success is to learn from your mistakes, and keep going.

All of the writers at Landlordology are experts in different areas of real estate. If you have any questions, please don’t hesitate to ask in the comments below.

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19 CommentsLeave a Comment

  • Ali

    Hi Lucas-

    I have always had fear of owning more than one rental property and market crashing after a while. I need your perspective as to how do landlord survive if they have like more than two rental properties and suddenly the market crashes like we had in 2008-2013? How did you survive during real estate crash? I have been told by friends not to buy too many properties as I will be in trouble when market crashes.

    • steve

      ALI;

      I will answer this question for you. The market crash affected mostly people who had mortgages, and if you were to keep your properties rented, then the “crash” should not have been a concern. Even if you are losing a little money each month, it is better to have a house rented for $900 and lose $100 (assuming your mortgage was $1000) then to have the property vacant and lose $1000 per month.

      I have held multiple properties for more than 25 years (while working a full time career) and if you keep your tenants happy and your houses in good repair, your tenants will refer people to you. I could rent 10 more houses (if I had them) just from the referrals alone. I usually have a stack of people waiting/wanting to rent.

      Good luck

      • Ali

        Thanks Steve. You are right on in understanding my concern which is basically how to keep the rent coming during market crash. Thanks for sharing

    • Jimmy Moncrief

      Ali – great question!

      For me, diversity in rental properties is great. With that being said, I wouldn’t be too leveraged.

      I hope that helps!

    • George Curtin

      We have been landlords for 17 years. We have had as many as 8 single family homes. What we have done and committed to, was that we NEVER took a second loan on rental property, or a HELOC loan. We got 30 year fixed mortgages, saved our money in an rental escrow account. When the escrow account grew, we would place funds down on the principle of the homes. That way you reduce your mortgage from 30 to 15 year fixed. Our tenants average 3 to 5 years of occupancy. Another advice, NEVER let tenant perform any work on the home, without a signed addendum stipulating the cost of the repair, time line for the repair and your written approval BEFORE any work is done.
      Good luck
      George

  • George Curtin

    As a longtime multi-property owner/manager. My suggestion is to 1. subscribe to Landlordogy, do your homework in regard to rent fee. Do a search on the web for rentals within the area that you intend to rent. This will give you and excellant idea. 2. Insure that you do a thorough background check including criminal. Make it a nationwide search. If the credit score is not at least 690, I do not rent. And do not make yourself the guy with the soft heart. If their credit score is bad, there is a reason. If they do not pay there bills than they will not be paying you. 3. no verbal agreements! EVERYTHING is in the lease, no exceptions. Good Luck to all

  • Laurel Reyes

    Hello. I just got into the real estate market. we took a home equity line of credit out to buy our house. I was looking for information on other ways to acquire properties, but not sure any other way. Thank you.

  • Barry Scovel

    Great comments from the others, and another helpful article, keep it up! Yes, check venues like Craigslist to see where the market is, and be a bit under. I also tell my tenants that our mutual understanding is that I take care of safety and comfort issues. I will not put a new rug in if the path between the bedroom and bath is slightly worn. When an issue arises, it gets handled. Our tenant who has been with us the least amount of time is 3 years, with the others between 5 and 7 years. I do have to check the 20% net figure.

    • Jimmy Moncrief

      Barry – that is AWESOME!

      The fact that your tenants are with you for a minimum of 3 years is a testament to how good of landlord you are.

  • Usen

    If you’re making $100k+ a year start buying single family. The tax write off will save you in deductions. You’ll make money even if you leave it empty. No job or make less than $100k a year start multi-family, or you won’t make much for yourself until the mortgages are paid off. (Don’t wait 30 years to see a ROI)
    2: Tricky. Evictions are time consuming & expensive. Of course the longer you wait to actually do it, the more expensive it becomes. I’d say evicting ASAP is the best course in 80% of cases.
    5: Tricky. And risky. You know what they say about slow & steady. Borrowing can grow your business fast but is also one of the things that can make you fail. For every 5 year millionaire there’s at least 2 failed borrowers who drowned in debt.

  • Darrin

    Regarding “4. Underestimating Maintenance Expenses”: the rule of thumb seems to be 10% of gross rent toward maintenance expenses. Is this what Landlordology recommends?

    • Lucas Hall

      Hi Darrin,

      I typically recommend 5-7% for everyday and preventative maintenance, and then another 5-7% for CapEx (big repairs like roofs, HVACs, siding, all windows, etc). Together, if you save allocate 10-15% of your rental income for these, you should be okay.

      The reason I say 10 to 15% is because if your monthly rent amount is less than 2,500K, I’d suggest 15%. If it’s over $2,500, I’d say you could get by with 10%.

      10% of 5K is a whole lot more than 15% of 2K. See what I mean?

      • Darrin

        Hey Lucas, thanks for the reply. Yeah my initial question was slightly longer using higher and lower rent amounts like you did as an example. I was thinking the same thing. So rather than separate Maintenance and CapEx, you sort of lump them into one 10-15% allocation? The monthly rents on my properties are under the $1000 threshold so I’d probably be OK allocating 15% toward the “Maintenance/CapEx Fund”. Great site by the way! So informative!!

        • Jimmy Moncrief

          Great questions Darrin!

          I actually use 20% to be conservative. Note, I’m also buying older properties that were typically built before 1970.

  • Paul Concannon

    I rented to a renter about 8 years ago. Everything went well for two years and he then informed me that he would like his two brothers take over his lease. Fine. They stayed about 5 years and then he wanted to move back in. Fine. However, whatever had changed in his life he ended up not paying me rent and coming up with excuses. Because we had an existing relationship I believed him. He finally got out, owing me $3,000, with $1,000 in legal fees and a pending court case. My point is, treat every tenant like a new tenant, even if they moved out under good terms in the past. Re-run background checks, credit checks, etc. Get first, last and security from them and move IMMEDIATELY on eviction notices on the date your state allows you to.

  • Landon

    6. Can someone help me understand the idea of passing the expense of repairs under $100 to the tenant in the lease? Is there an example of this lease entry in the Lease articles? I would appreciate a better way of clarifying this in my lease.

    Thank you,
    Landon

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