Investing in rental property is becoming increasingly popular across the United States. Not only is it a great way to grow your capital wealth, but it can also provide a source of passive income, which can go a long way towards helping you to achieve your financial goals.
However, the first steps into a life as a landlord can be treacherous. If you are not an expert in the world of rentals, mistakes are likely. And the problem is, they can also be very costly.
To help you avoid common rental investment mistakes, we have gathered a list of the top seven things that real landlords wish they had known before they got into the business. By banishing these assumptions, and learning from their experiences, you should be closer to making your purchase of rental property a huge success.
Know If the Seller Is Motivated
When it comes to buying a property, one often overlooked aspect is how motivated the seller is to actually sell their property. The Business Directory offers a definition of what a motivated seller is below:
A seller of property – for example, a residence or automobile – who is compelled to entertain reasonable offers from prospective buyers. The motivation may come from economic circumstances or a desire to abandon ownership. The buyer is often able to purchase the property at a reduced price or under favorable terms.
We are putting this at the top of the list because it could be the single most important factor in making a profit out of your investment.
Keep this in the front of your mind when choosing a property, and if the seller does not appear motivated to sell, then move on! Buying rental property is a business, so keep emotions at bay. Use your head and always aim to pay under the property’s market value.
Fixer Upper? Think Again
Properties in need of refurbishment can be very attractive to new investors as the asking price is typically a good deal lower than other properties on the market. Seeing a “great” deal can lead to making offers without taking the time to think them through properly. This is something numerous landlords wish they hadn’t done.
It is important not to be fixated on the low asking price without factoring in the cost of the refurbishment as well as the time it will take to get the property into a good livable state. Materials and labor can add up quickly and each day the contractors are working is another day the property is not earning rent.
For some individuals, fixing up properties to rent is a passion and a full-time job. But, for the majority of people looking to supplement their income in an already busy life, they are simply not worth the hassle. Properties in need of serious rehabilitation can cost more money and headache than buyers realize.
So, don’t be caught unawares. Ask three trusted contractors for quotations on the work to be completed as well as estimated time periods before you make an offer. This will allow you to grasp the full picture before you move forward.
Choose Tenants Very Carefully
Once you have purchased your property, you will want to get someone inside, paying rent as soon as possible. Of course, that makes business sense. However, this process should not be rushed! Bad renters can be extremely expensive, causing your entire business plan to flop and ruining your investment. This is one mistake landlords look back on with pained expressions.
There are countless horror stories of tenants causing serious damage to property in a relatively short period of time. Taking these kinds of renters to court is a long and costly procedure, so it is best to avoid the situation altogether, if possible. Thoroughly screening potential tenants and finding responsible individuals who will take care of your rental purchase is a must.
It is recommended to start by setting base criteria, allowing you to screen interested applicants over the phone. This can include points such as past criminal convictions or bankruptcy.
For potential tenants that pass your initial test, an application form can be completed. This will provide you with further details and enable you to complete full credit and reference checks before you consider accepting them as a new tenant. It may seem like a waste of time, but finding a good tenant is a real blessing that will pay dividends in the future.
Ideally, you will have fewer hassles over the months, less wear and tear on the property and absolutely no late payments. If you are lucky enough to find great tenants, be sure to treat them well, possibly even promising to hold the rent at a set rate for the duration of their lease.
Any short-term losses you incur by doing this will be more than covered over time. Plus, it is beneficial to know you have somebody taking care of your investment.
Take Time With the Rental Agreement
Your rental or lease agreement is a critical document and deserves more attention than simply downloading and signing a template. A template can be a great place to start, but be sure to research any local state laws that may not be met by your contract.
Also, think about what is important to you, decide your boundaries on pets, how much notice you would like to receive when the tenant moves out, noise levels and even late fees.
The lease agreement is your one chance to set rules, so don’t rush. Be sure to ask an attorney to check over the document before signing it to ensure there are no loopholes.
Once you have set your rules, it is essential you stand by them from the beginning. Consider, for example, a tenant paying rent late one month when they have never done so before. If your reaction is “never mind, pay when you can,” you will be in a tricky position if they are late the following month.
The relationship between landlord and tenant is strictly business and it is easier if this is established immediately.
Plan for Property Tax Raises
Property taxes can shoot up, steeply, without notice. So be aware.
This mistake can be costly, especially if you have set a rental price without taking into account the added expense. Avoid stress and loss of money by researching as much as you can before you decide on your rental amount. The rules vary across states, so be careful here.
By failing to take property tax increases into account, you could be stuck with a shortfall every month for the duration of your lease … something that could be enough to cause the business to ultimately fail.
Build a Maintenance Savings Pot
The very point of your rental property is to be lived in, and as such, it is expected that maintenance will be required to keep it in a good condition. Wear and tear is normal. Unfortunately, maintenance issues often happen unexpectedly and the costs, especially with areas such as the roof, can mount up quickly. The best way to handle this issue is to keep a savings fund specifically for maintenance of your rental property. It is also wise to visit the property regularly in order to catch any niggles before they are too far gone – and more expensive – to repair. A good rule of thumb is to inspect your rental properties every three months in order to stay on top of the maintenance.
Fix any snags as soon as you notice them. This will keep your tenants happy and your investment safe.
Know Your Stuff
The underlying message that comes through loud and clear when asking landlords what they wished they had known before buying a rental property is to do your homework. Research is key with all aspects of buying for an investment. Research the location, the property type, the demographics, the seller’s motivation, the loan types, how much rent is being charged locally and so on. The law surrounding real estate can also be complex, especially when it comes to rentals, so be careful not to be caught off guard.
In addition, don’t be lazy when it comes to due diligence. Keep on top of everything. If this is too much for you, then seriously consider using an agent. There is certainly no shame in that and it may be one of the most sensible things you can do, especially when just starting out!
A real estate agent will know the movements of the industry, especially within a given location. They will be aware of trends and other happenings in the market as well as be privy to the inside scoop on properties that you may not be able to find out for yourself. They will also have contacts they can recommend to support you along the way. So, if the homework is too much, consider hiring someone to do it for you.
When it comes to navigating the real estate minefield and buying your first rental property, it is almost expected that mistakes will be made. While it can be great to learn this way, it can also be expensive and complicated to rectify. There are many instances of buyers deciding to flip their properties ASAP instead of continuing with becoming a landlord. But, by following these 7 suggestions, you might just escape a few of their biggest regrets and make your own venture a real success.