I 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.
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.
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.
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.
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.
- Financial Independence – A Landlord’s Perspective
- Building a Rental Business Plan for Financial Freedom
- Build an A-Team of Experts to Help You Succeed
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.