The Top 5 Landlord Mistakes
I know I’ll get just as many landlords who agree with me as those that will disagree with me, but I’m gonna take a stab at it anyway!
So here’s MY list of ‘The Top 5 Landlord Mistakes’ (for 1-4 unit rentals primarily … but I’ll tackle apartments/commercial property mistakes in a future issue):
#1) Being Under-Capitalized
I remember early in my real estate career having over 20 rentals (mostly 1-4 unit residential properties) … being flush with equity … yet struggling to pay the light bill!
Ever been there?
That’s why my investing philosophy these days is to first get your cash/cash flow needs taken care of first, BEFORE you ever consider hanging on to long-term rentals.
I like the idea of having at least $50-$100k in walking around cash (or whatever amount gives you some peace of mind), before you do any buying & holding. And the best way to build this cash buffer, in my opinion, is through the various real estate ‘flipping’ strategies, including wholesaling, rehabbing, creative/seller financing, and lease optioning.
You can also build it through your business, or a side venture, maybe stock trading, or just good ole fashion saving. Go with whatever is your baily wick! (Is that even a word? I know I’ve heard it somewhere before!)
Now on top of this cash stash of $50-$100k, I also like the idea of having a cash reserve of $2-5k per property. I know this might sound like overkill to some of you (maybe I’m still traumatized by those early years of being equity rich, cash poor … and not being able to take my girlfriend out to dinner and a movie! LOL), but it’s just amazing how often a heater malfunctions … or a water heater blows … or something gets stolen (like a whole AC system that just got ripped out of one of my client’s rentals!)
Stuff happens in the landlord game. It’s best to be prepared.
#2) Not Buying Right
A “deal” came across my desk the other day that touted a whopping 15% cash-on-cash return.
The problem? It only listed taxes and insurance for operating expenses.
Uhhh … how about advertising? Or a vacancy factor?
How about property management? Or repairs? And utilities?
Are there any HOA fees? Or any other kind of maintenance costs like gardening and pest services?
Bottom line: For 1-4 unit rentals, operating expenses typically should range between 35%-45% of the gross rental income. Anything you see below 35% should be a big warning flag!
#3) Being Your Own Property Manager
I had lunch with a colleague and friend last week who tells me … “I’m selling off all my rentals!”
“Why?” I ask, “I thought the plan was to hold them for the long term? You’ve only had them for a couple years.”
“Yeah that was the original plan”, he says, “but I’m trying to figure out what I really want to do and what I’m passionate about … and dealing with tenants as much as I do doesn’t really inspire me. I’m kinda sick of dealing with them!”
Hmmm … classic case of landlord burnout.
The main problem as I saw it? He was managing his own properties!
I was there at one point myself, so I totally understand the need to do that. But after being lied to … manipulated … pleaded with … and guilt-tripped by too many tenants (ok, maybe I’m being a little overly dramatic here … but it didn’t feel like it at the time :)) – I made the decision I would never, ever, ever manage my own properties again!
Being a property manager has gotta be one of the toughest (and most thankless) professions in the world. It really is best to leave it to someone who enjoys it … and is good at it.
Here’s my advice: Forget about trying to be your own property manager. If a property’s numbers don’t support putting professional property management in place --- it flat-out ain’t a good enough buy!
#4) Not Knowing How to Deal with Tenants
What I’m mainly talking about here is not really having a system or process for dealing with tenants.
Here are some common mistakes:
- Not having a written screening process or criteria for acceptance
- Accepting partial rent
- Failing to EVICT
- Accepting excuses
Most of this happens simply because a landlord has no kind of system on how to deal with tenants.
Solution? Write out your processes for every situation.
For example, when screening a prospect, a simple checklist on everything that needs to be done, in the proper sequence, can work wonders.
#5) Being a Landlord in the First Place!
What I mean is … instead of renting, why not Lease Option (aka Rent-to-Own) instead?
It’s not always the perfect solution, and isn’t appropriate in all situations, but for single-family homes … I think it’s the ultimate way to go, and fits in just about most situations.
Think about it …
Rather than dealing with tenants, toilets, repair requests, phone calls, collection visits, bad property managers, and all the other hassles a typical owner has to deal with, all or most of that can be reduced or eliminated by offering your house as a lease option rather than a straight rental.
Here are the main reasons I like lease options so much:
* You’re attracting tenant/buyers with an ownership mindset, so they tend to take better care of the property, and oftentimes, even make improvements to it.
* You can typically get a larger up-front deposit, which is usually non-refundable.
* You can typically get a larger monthly payment. I typically shoot for 10-25% above market rent.
* Because you’re offering a valuable asset for hopeful homeowners who can’t buy any other way at the moment, you can typically sell at market price or even above.
And here’s what else makes this such an amazing strategy: You can set up your lease options as either a hold strategy … or a true selling strategy. Depends on your goals.
Yup … if you really want to just hold your property for the long-term, you just qualify your tenant/buyers more ‘loosely’. If you really want them to exercise their option and buy your property, you qualify them more stringently … and maybe even have them work with someone to fix up their finances (like a mortgage broker who can shore up their credit, get their debt-to-income ratios in line, etc.)
Anyway, there you have it … those are just MY top 5 landlord mistakes. What do you think?
What are YOUR top 5?