During these economic times, there is no doubt that rental properties are some of the best real estate investments to have. They provide stable cash flow despite the fluctuations in property value. To be successful, it’s important to know about any rental property mistakes beforehand so you can avoid them later. Over the next few weeks, we will be exploring the real estate market and learning how you can not only get into real estate but also maximize profits and success.
Five Avoidable Rental Property Mistakes
Like anything else, managing rental properties comes with its own unique learning curve. There are specific things you should and shouldn’t do. Fortunately, there are tons of investors that have gone before you that have learned what doesn’t work the hard way so that you don’t have to make the same rental property mistakes.
This article will help you skip some of the traps that many first-time rental property investors fall into!
Ready? Let’s dive in!
Mistake #1: Underestimating the Management Process
Securing your first property and finding a tenant is only the first piece of the puzzle. After your tenant moves in there are a ton of other tasks that you will need to develop processes to handle most efficiently, tasks that could cause an inexperienced project manager tons of headaches and stress. You will need to determine how you are going to collect rent and enforce on-time payments, how you’re going to maintain the property and handle service requests for repairs, and plenty more miscellaneous items that can pop-up during a given week. Remember our goal here is passive income, this would be pretty hard to scale if your phone ringing off the hook 24/7!
It’s important to outline the expected problems/task and develop initial processes to manage them effectively. These initial processes do not have to be bulletproof. You will have the ability to polish and improve them as you collect more data/experience.
When you have enough resources, hiring an outside property management company could be very beneficial and give you peace of mind. After all, what good is having passive income, if you can’t enjoy the process and the freedom to expand
Mistake #2: Getting the Pricing Wrong
Pricing is vital to any rental property investor, especially if your property is not free and clear (no mortgage). If your price is too high for your market/area, your property will sit vacantly and incur excess overhead costs that eat at your bottom line. Price your property too low and you’ll run the risk of losing money when you factor in the mortgage, taxes, utilities, and general upkeep. Pricing too low also runs the risk of attracting the wrong kinds of tenants that may not respect your property and cause expensive damages.
To get this right and find a good rental property, you should survey the surrounding areas and see what their pricing and occupancy rates are. Be careful not to set your price low just because others are. Test out the pricing in a comfortable range that will allow you to stay competitive and also earn a profit. If the property goes vacant for 30 days or more consider pricing lower or adding additional amenities to increase the property’s perceived value to renters.
Mistake #3: Not Accounting For Vacancy Periods
When crunching your numbers and determining your expected profits, it is important to account for periods between renters where your property may sit vacantly. This could be due to repairs or cleaning in-between tenants, or because of a downward trend in the rental market. You want to make sure you have the additional cash reserves to give you a financial cushion to cover mortgages, utilities, and other misc expenses. One mixed mortgage payment could exponentially increase depending on the market. You don’t want your entire portfolio at risk because of improper accounting/financial management.
Mistake #4: Not Screening Your Tenants
Your property and your cash flow are in the hand of your tenants. This means that you should definitely pay attention to who you allow to become a dependent variable in your operations and livelihood! It can be tempting to just allow anyone to rent your property especially if your property has sat vacant for an extended period of time. However, this could be a huge mistake. You should create a thorough screening process and be sure to follow this process consistently. Factors that are common amongst rental property investors are creditworthiness, background, and references. Be sure to verify the accuracy of your future tenant’s rental applications ( rental history, employers, job history, etc.). Just remember to be mindful and adhere to the fair housing laws in the process!
Mistake #5: Bad Record Keeping
The goal is passive income, yes, but you should still treat your properties as a business. You should keep track of your income, expenses, and other misc items that contribute to a healthy financial record. Things such as repairs and maintenance costs could even save you money in taxes each year. You should develop processes for the safe and accurate storage of this data.
There are several online platforms that will allow you to input financial data and even upload digital copies of receipts. You will also want to keep accurate information on ALL, and I mean all, communications with your tenants. This includes but is not limited to, emails, text messages, phone calls, copies of important documents such as leases agreements, contract addendums, and property inventory (just in case of fire or other natural disasters). Doing so will ensure that if the worst happens you are prepared and your business will not suffer!
Other Rental Property Mistakes
These are just five of the common rental property mistakes new landlords make when renting out their first property. If you have a property or are in the process of securing one, I highly recommend you spend some time creating an action plan to address the five before mentions mistakes so that you do not make them as well. This will surely make your first property experience a lot more pleasurable and make it easier when it’s time to expand and secure more properties!
I hope you found this article helpful and impactful!
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