For better or worse, everyone who's been a homeowner thinks they have all the experience they need to be a landlord. While it's true that the most common landlord mistakes are easy to avoid, the problem is that new landlords make them anyway, usually by failing to commit enough time and money to their rental investment.
These two basic failings cause an entire host of other problems, from using a rental agreement without the required disclosures to losing months of rent by failing to serve an eviction notice immediately.
Being a landlord does require some investment of time and effort, especially in between tenants. Between changing locks, cleaning the rental property and making overdue updates and repairs to it, advertising for new tenants, showing the rental property, researching each rental application, drafting a legally enforceable rental agreement, negotiating the rental amount and the security deposit with the tenant... it's a lot of work, and work that most landlords with unrelated full time jobs are reluctant to invest.
And the work is not only limited to screening new tenants. When tenants call you, in the middle of the night, because a tree fell through their roof, that's going to require a lot of immediate attention on your part. But far more dangerous are the little things tenants call about, which are easy to postpone addressing, but that eventually lead to the tenants breaking the rental agreement or worse, suing you.
Landlords must be responsive whenever a tenant contacts them, even if it's only to inform them politely that a requested repair is not in the budget right now, but the temptation to avoid "dealing with it right now" is difficult to suppress, when you're busy with another job, your family, and everything in your life that seems far more immediate than a rental property you never see.
Another situation that demands immediate attention from a landlord is when the tenants violate the rental agreement, whether by failing to pay rent or another breach of the contract. It's easy to procrastinate serving them with an eviction notice, as both compassion and laziness coalesce to help you justify giving them "just one more week."
The eviction process is long and tedious, so you have to start the wheels in motion the moment the tenant violates the rental agreement. From serving the eviction notice to the actual put-out date, it's usually takes between one and three months, which is plenty of time for the tenants to bring the rent current... and plenty of time for you to suffer through paying the bills on the property on your own.
Which brings us to the second major failure of new (and sometimes veteran) landlords: under-capitalization. It's all too tempting to calculate your monthly cash flow based on ideal circumstances: no unexpected expenses, and full rental income being collected on time.
The fact is, however, that many tenants don't pay their rent on time, and sometimes not at all, which means you'll have at least a few months of having to carry all the expenses on your own. And expenses don't simply mean the mortgage; real estate taxes, rental property insurance, eviction notice and expenses (which can be substantial), advertising expenses, repair costs... you will easily lose several thousand dollars each time you have to go through the eviction process.
To address these high and often unexpected expenses, many landlords borrow the maximum possible mortgage amount, in hopes of minimizing their cash invested. This is, unfortunately, a counterproductive reflex, as increasing your mortgage balance will simply push your monthly expenses higher, driving your cash flow down even further and bankrupting you faster when there's no income from a rental agreement. It will also make you even more likely to procrastinate on serving an eviction notice and going through the painful process of eviction.
As hard as this sounds, it's best to keep your predictable monthly expenses (ALL of them, down to the fees for maintaining your legal entity), below 50% of the collectible rents. This will ensure positive cash flow, allowing you to set up a cash reserve for your rental properties to help you survive the financial dry months.
While these problems are pervasive among landlords, they are also easy to avoid by devoting the time and resources necessary to be a landlord. If you don't have the time and money to devote to your rental property, from buying a strong, legally enforceable rental agreement package to being instantly reactive in serving an eviction notice, then now is the right time to reconsider your career as a rental investor and landlord.
If, however, you are willing to devote this time and money, there is an excellent return to be found in rental investing, as you suddenly find yourself immune to fluctuations in the real estate market and able to buy low and sell high at your convenience.
Brian Davis is a landlord & real estate investor, currently traveling the world and enjoying the benefits of his investments. He is also a contributing writer for NuWire Investor and EZ Landlord Forms, a supplier of custom rental agreement forms and state-specific eviction notice forms.
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