Avoid These 5 Common Rental Property Mistakes
By Paul Esajian on June 22, 2017
There is a right way and a wrong way to own a rental property. With the right way, you can earn monthly cash flow and build long term appreciation. The wrong way will leave you frustrated every month scrambling to break even wondering where you went wrong. There is often a fine line between success and disappointment. Just a few wrong choices can turn a property with positive cash flow into a financial burden every month.
Most landlords which they had a do-over on a property from time to time. Instead of starting over it is best to avoid the mistakes before you get too involved. Here are five common rental property mistakes you should avoid.
- Pursuing A Property At All Costs. Everything with your rental property starts with the purchase. There are many investors who only think that purchase price matters with rehabs. They fight for every dollar on a fix and flip deal but are not as aggressive when it comes to rehabs. Since they are not selling the rental property in the near future it doesn’t compute just how important purchase price is. The purchase price sets the baseline for everything else in the property. It directly impacts the monthly cash flow which reflects the strength of the property. It is important that you fight for every dollar on the rental property just as you would for any other property you consider. If the purchase price becomes too high you need to walk away and move on to the next one. You should never fall in love with a property based on anything else but the numbers. The house may check all the boxes of what you want but if the price becomes too high it immediately loses its appeal. As difficult as it may be you need to know when to walk away from a property you have had your eye on for weeks.
- Not Knowing The Numbers. The projected rent amount is just one of the pieces of the cash flow puzzle. Getting your rent number is great, but it doesn’t necessarily mean you will have a profitable property. There are a few core expenses that almost every property has. Taxes, insurance and certain utilities are the minimum but you also need to account for maintenance, vacancy, snow removal, lawn care, periodic cleanings and town fees. Most of these items individually will not break the bank but added up they have an impact. When you are looking at a property you can make the numbers anything you want to trick yourself that you are getting a good deal. When you take ownership the numbers become real. You should always take the worst case with every expense or at least know what must happen to trigger an increase. It is very disappointing thinking you will net a certain monthly amount when the reality is different. Always know all the numbers before making an offer.
- Assuming Appreciation. The goals of rental property ownership vary based on the specific owner. One owner may view the property as a long-term acquisition while another only wants it for two years before they look to sell. There is no right or wrong philosophy only personal preference. Regardless of your ownership timeframe you should never assume appreciation. Even though home values have slowly risen over the past few years there is no guarantee that your property will do the same. If you are juggling things around in your business expecting a windfall from the sale you may be left disappointed. This isn’t to say that you won’t be able to sell for your price but you can’t ever assume it. You are better off running the property based on the assumption that the value will be the same as when you bought it or only appreciate slightly. This way any gains will be a bonus and not a necessity.
- Management. If you are like most new landlords you are trying to squeeze every dollar out of the property. While there is nothing wrong with maximizing the property, you should know your limitations. Managing even a sole single-family property has its share of headaches. You will get phone calls every month that often require trips to the property. If you are lucky these calls will be nothing more than a nuisance. If not, you will be forced to deal with whatever issues pop up. It could take hours finding someone to do a specific job or piecing together a work schedule. Regardless if real estate is your full-time job or not this can get time consuming and frustrating. The alternative is to take a hard look at management. A property manager handles most everything associated with the property. They allow you to focus on other areas of your business or to spend more time looking for new deals. Instead of getting burnt out and frustrated with being a landlord they make it as easy as possible.
- Not Knowing Laws. There are plenty of dedicated rules and regulations a landlord must know. In addition to a handful on the federal level there are also state and towns laws as well. Ignorance of the laws is not excuse. Breaking one of these laws can result in a fine or in extreme cases jail. On the local level, it can mean a loss or suspension in the ability to rent for a certain period of time. Always spend the time to research all rules before getting too far.
Just a few mistakes with the property can get you in trouble. Avoid these five rental property mistakes at all costs.