Owning rental property as a source of income, or being a landlord, is a very decent living when done right. Even as a second income source, it’s a great hedge against volatile economic times. Real property is one of the few things that remains even when economies go bad. People always need a place to call home.If you’re getting started as a landlord, or even have experience and want to make your income stream flow more smoothly, there are several pitfalls to avoid:
- Treat your rental business as a business. That means don’t rent to friends or relatives. Don’t be tempted to rescue or rent to anyone without a proper lease contract. Headaches from a relaxed approach can make you wish you never went into the rental business at all.
- Fully screen ALL tenants. Have every potential tenant fill out a rental application, even if you’re renting to an immediate family member. Check their credit, check rental history and do your due diligence.
- Do NOT skimp on insurance. A variety of insurance coverage will protect your valuable investment. Insurance is part of running any business and must be part of your business plan. Otherwise, you’re asking for a fire to bring down your hail-pierced roof between your burning walls right into your basement, flooded with backed-up sewer water.
- Know the law. Consult with a real estate professional on this one, someone who knows state and local, as well as the federal fair housing rules. Or, you can read through this. Don’t treat your rental business as a hobby, even if it isn’t a significant source of your income.
- Don’t neglect tenants or maintenance, keep the building up to code and habitability standards.
- Don’t delay eviction proceedings. An eviction takes time, and if you put off starting them when you should, you can suffer major headaches to your pocketbook from lost rent and even open yourself up to legal action. This also includes failing to enforce lease terms (for example charging late fees or enforcing rules on pets or noise).
- If you let anything slide, it will be nearly impossible to get things back to normal or argue with a tenant who wants the same special consideration you gave another tenant. Under the heading of maintenance, performing unskilled repairs when you should hire a professional is a serious pitfall waiting to eat up a considerable amount of your time and money before the professional has to come in anyway and not only fix the original problem but any damage you have done in the process.
- Know which maintenance tasks require immediate work and which you can put off for a while. (Only a few can be delayed.)
- Unrealistic financial expectations/underestimating expenses. Don’t think your rental will always be fully rented. There will be gaps, and you’ll need to save up some cash to cover that two months where no one was in number 221A. Save lavishly.
- Get everything in writing. The lease must spell out in detail all the obligations of both parties. You as the landlord are responsible for code and habitability maintenance, but are you also going to be mowing the lawn or will your tenant do that? How about washing the windows? This also includes keeping a diary of contact with the tenant. Documenting everything is vital to avoid arguments or even legal headaches.
- Setting the wrong rental rate, or setting a rent rate without performing a market analysis. Nothing is going to send your business down the tubes like losing hundreds or thousands of dollars a month, either by undercharging or overcharging. Overcharging means rental units sitting empty, attracting nothing but dust, roaches and (Heaven forbid) squatters. Undercharging will make savvy tenants wonder what’s wrong and look elsewhere while allowing access to the wrong tenants, increasing the likelihood of evictions or unnecessary repairs. If an attractive building or area has rents far too low, undesirable tenants can find it within their current means.
Don’t try to do it all. Know when to get professional help. Many of the pitfalls listed above mean a lot of extra work for you, and have a great deal of details to keep track of. There are professional property management companies to take out the guesswork. See our free guide to find the best property management partner for you.