You’ve followed our guide on starting your real estate investment (Real Estate Investing: How To Get Started), developed a solid plan, prequalified for a loan (Buyers: How To Find The Best Mortgage & Get Prequalified), and located the income property that best matches your investment objectives. Now, it’s time to review the steps to make your income property maximize profitability and minimize headaches.
Treat It As A Business
We can’t stress this enough. Your rental property IS a business—and you need to treat it that way. This type of investment is not hands-off. It requires involvement, lots of time and attention, and the mindset of a business professional.
Limit Your Liability
Here’s every landlord’s nightmare: a tenant throws a big party, one of his guests has one drink too many, falls off the balcony, breaks his neck, and sues both tenant and landlord. The landlord discovers his/her liability insurance is inadequate and is now personally liable for hundreds of thousands in damages.
Real estate investors who rely solely on insurance as a means of protection from personal liability take a significant risk. Liability policies typically have limits, exceptions, and carve-outs. While the chance of a loss that exceeds policy limits may be remote, if it happens, the consequences can be devastating, says Jeff Weaver from legalzoom.com.
To better protect yourself and your personal assets, consider setting-up your real estate business as a Limited Liability Company (LLC).
LLCs have become one of the most preferred forms of business entities through which to hold title to investment real estate properties, according to legalzoom. The insulation from personal risk exposure coupled with the relative ease of administration and potential tax benefits makes ownership of investment property through an LLC a very desirable option in most instances.
Before you do, it is always good practice to seek legal and tax counsel.
To Manage—Or Not?
First-time investors are strongly advised not to hire a property management company in the early stages of their business. Not only will it save you money, but it will allow you to gain valuable knowledge and expertise. Once you thoroughly understand how to manage a property, you will know what to look for in a management company as you grow your portfolio.
Regardless of whether you choose to hire a professional management company or not, knowing the seven most-common mistakes landlords make will save you money and headaches.
Consider them the seven deadly sins of landlording.
Mistake # 1: Inadequate Tenant Screening
A vacant property is preferable to a property rented to the wrong person. Not only are bad tenants a cause for headaches, but they can quickly eat up profits.
Screening tenants is about digging into a potential tenant’s background and discovering who they really are, says Brandon Turner at BiggerPockets.com. An application can only tell you so much and can be easily manipulated or falsified. Screening your tenant means looking into the information they provided, as well as analyzing outside information you can find on your own to get the whole picture.
When digging, however, make sure you adhere to Fair Housing and Discrimination Laws. Otherwise, you could be setting yourself up for a lawsuit.
To set up your tenant-screening process, start by reviewing this comprehensive guide.
Mistake # 2: Assuming The Property Will Always Be Rented
You’ve run your numbers and they look great. But wait! Did you consider vacancy?
Vacancy rate is the percentage of a year that a property sits empty. The nationwide vacancy rate during Q1 of 2019 was 7%.
To obtain the specific rate in your investment area, check the U.S. Census Bureau, contact local property management companies and large landlords, and/or ask a real estate agent like Julie to conduct a comparative market analysis on local rental property stats available on the MLS.
Mistake # 3: Underestimating Repairs & Maintenance
According to a common rule of thumb, you should set aside at least 1% of the property’s value every year for home maintenance. For larger repairs, saving 10% (annually) of the total cost of your property taxes, mortgage costs, and insurance payments is recommended.
Mistake # 4: Having A Shoddy Lease Agreement
Take time to research and find the lease agreement which offers you the best protection and suits your particular needs.
There are several online services offering standard and customizable lease agreements which could save you money in legal fees. To get you started, we’ve compiled a short list:
- uslegalforms.com, rated A+ by the Better Business Bureau (BBB).
- lawdepot.com – BBB A+.
- Members of real estate site BiggerPockets.com have free and unlimited access to landlord forms.
Once you’ve made your selection, it is always good practice to have your lawyer review it.
Mistake # 5: Not Enforcing Lease Terms
Being a nice landlord is good practice. Neglecting tenants is not. But that doesn’t mean you should be lax when enforcing the terms of the lease, which, after all, were accepted by your tenants upon signing.
If you said late rent payments would incur a penalty, charge it. If you outlined that no pets are allowed and you later discover your tenant hiding a puppy, enforce the penalty—no matter how adorable the puppy.
If your tenants realize you are lax about the agreed terms, they will act in like manner.
Mistake # 6: Delaying An Eviction
The most common reasons for tenant eviction are:
- Non-payment of rent
- Habitual late payment of rent
- Damage to the property
- Disrupting other tenants
- Tenant refusing to move out after the lease has ended
Not starting eviction proceedings as soon as legally possible can be a very costly mistake. If you run into problems with a tenant and are unsure about your rights or how to proceed, contact an eviction attorney right away.
Mistake # 7: Not Conducting Thorough Move-In/Move-Out Inspections
Aside from normal wear and tear, tenants should return your property in the same condition it was when they first moved in.
To avoid misunderstandings, use this thorough guide provided by Zillow.
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