Rental Properties: Common Mistakes to Avoid
Investing in rental properties is a proven way to earn a great income, and when done right can easily become a person’s full-time job. Unfortunately, many first time investors do not take certain things into account when budgeting or planning to invest in a rental property, leaving them with a more work, and potentially more debt than they started with. Here are some common mistakes made by first-time rental property investors.
Not having a Lease
In an ideal world, leases would not be necessary. We could take a persons word, and not have to give it a second thought. Sadly, that this is not how our world works. Without a lease you leave both yourself and your tenant at risk and at fault should future problems arise – and odds are, they will. Without a lease, you risk being held responsible for any problems a tenants potential pet might cause (property damage, injury..etc…), you leave yourself open to your tenants having pets (which might not only go against what you want but city bylaws as well), you also leave yourself completely unprotected should they decide to leave prior to when they had initially stated, causing you to lose out on potentially thousands of dollars in rent.
Not Taking the Time to Find the Best Tenant Possible
When it comes to finding the right tenant, there are a few red flags that should NEVER be ignored: bad credit, unable to hold down a job, too many pets, unable to hold onto an apartment. It is imperative that you do your research when it comes to finding the best tenant(s) possible, this will not only assure that you get your rent on time, but that your property will be cared for while they are there. A few important steps in locating this ideal tenant include holding interviews (make sure to only ask legal questions, avoiding topics like marital status, sexual orientation, or background), calling and conversing with references, and doing complete background and credit checks.
Underestimating the Actual Cost of Owning and Operating a Rental Property
Underestimating the actual cost of owning and operating a rental property is perhaps one of if not the most common mistakes that first-time real estate investors buying a rental property make. The reality is that approximately 80% of the rent that you collect should actually be going towards the mortgage, operation, and upkeep of the property itself. This might include landscaping, plumbing, insurance, or an emergency fund. Having an emergency fund is important as there are certainly going to be things that go wrong, or need replacing without it, you as the landlord could have to pull money from your own pocket in order to maintain the proper upkeep of the property.
Not getting Landlord Insurance
Landlord insurance is perhaps the one thing that all real estate investors that are renting out a property absolutely NEEDS to have. Landlord insurance can protect you in the event of a flood, robbery, or if you have a tenant default on their rent. Not having landlord insurance could potentially end up costing you thousands of dollars.