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What are the most common and costly mistakes that landlords make? We list them down – so you can avoid them.
It’s no secret that owning a rental property can be a rewarding venture. At first glance, being a landlord seems like a good deal all around – you get to sit back and earn money passively.
But as any seasoned landlord will tell you, overseeing rental properties is not all it’s cracked up to be. There is a lot of work and effort behind the scenes. Additionally, there are a lot of pitfalls landlords must look out for to prevent losing money, time and sleep.
So in this article, we list down the most common mistakes landlords make and how you can avoid them in your own search for success in the rental market business.
1. Not being strategic with your pricing
Savvy property investors will attempt to maximise the rental income they can get. However, to succeed as a landlord, it is crucial to stay reasonable when setting your price.
For example, the city where your rental property is located currently has a weekly median rent of $450. It may be tempting to list your property at the top of the pricing expectations, but this can be a risky strategy.
Generally, inquiries from potential tenants during the first few days your property is listed – if you’ve set your rent price too high, they may not give it a second glance, or they may even choose to ignore it completely.
If your property is unoccupied for even just two weeks, you will have technically lost around $900 in rental income.
If you set your price by just $10 below the average, but your property would be leased immediately, the small reduction would actually save you money in the long run – “costing” you just $520 over the financial year.
Another mistake that landlords make is not being flexible with their rent price.
As a landlord, you should be reviewing the rent on your investment property as often as possible and deciding if you want to increase the rent or leave it at the current rate. You should also be up-to-date and respond to all major changes in the rental market.
For example, it’s a good idea to accept discounted offers in a slow rental market and boost prices slightly during the periods of the hot season. This way, you will get the most out of your property.
2. Choosing the wrong property manager
Not all property managers are created equal. A good and experienced property manager (or property management company) will take the time to understand your financial objectives and will actively communicate and work with you to ensure that you will get strong returns and see low vacancy rates.
They’ll make sure there’s always a good tenant in your property and will collect the rent, pay the bills and take care of repairs and maintenance. They’ll also look after the monthly and annual accounts so your accountant can prepare tax returns during tax season.
Additionally, hiring one is not particularly expensive, and their services are tax-deductible.
A good property manager will save you time, money and effort by making owning a rental property straightforward and rewarding.
While a good property manager can be a lifesaver, a bad one can bring more trouble than it is worth. So make sure to check out our guide on how to find the right property manager for you.
3. Having inadequate insurance
No matter how long you have been in the rental property industry, you must have seen the tenant horror stories. You may have read stories online about tenants who caused significant damage to their property or cases where it got really ugly and even resulted in a long-standing legal battle between a tenant and landlord.
With that said, it’s better to be safe than sorry. Your rental property is a significant asset, and it’s important to insure it properly.
Landlord insurance can cover risks that a real estate investor faces as a landlord. It also is tailored to include aspects not covered by other types of home insurance policies. Common features of landlord insurance include:
As an added bonus, because payments for landlord insurance are an investment expense, your policy premium is also tax-deductible.
4. Not staying on top of repairs or maintenance
One common landlord mistake that tenants hate is postponing repairs or maintenance on their properties. It can be tempting to delay repairs and maintenance issues on rental properties when you don’t have to personally deal with them every day.
However, this can be a costly mistake that may cause tenants to be unsatisfied and eventually drive them to move out, which can consequently hurt your pockets. Furthermore, you should be aware that a small repair issue today can snowball into a hefty repair bill if you leave it unchecked.
Minimise the risk of making your tenants angry by instantly dealing with maintenance problems. Crunch your numbers to make sure you’re charging enough in rent to at least help cover a portion of ongoing maintenance costs such as painting, cleaning and carpet cleaning between tenants.
Plan on having to pull money either out of the business or your own pocket in the event that you don’t have the cash needed to make major one-time repairs, including repairing structural damage, replacing appliances etc.
Additionally, accurate estimates of home repair costs are vital when checking your cash flow and investment situation.
5. Postponing an eviction
One of the most costly mistakes a landlord can make is not starting eviction proceedings as soon as legally possible. If you encounter problems with a tenant and you are unsure about how to proceed, it’s best to contact a legal professional as soon as possible.
Another common landlord mistake is not conducting move in/move out inspections. Without detailed inspections as tenants vacate or occupy a property, you will have to deal with all the damage and emergency costs, and you will not know about mould leaky pipes, pest issues etc, which can cause significant damage to your rental property.
6. Not enforcing lease terms
If you added in your rental agreement that late rent payments would incur a penalty, charge it. If you outlined that there are no pets allowed and your new tenant recently fancied getting a dog, enforce the penalty.
If your tenants realise that you are not upholding the terms of your lease agreement, they will also be lax about following it. Remember to set and enforce the standard you want to be upheld.
7. Not accounting for vacancy periods
If you have taken out an investment loan to purchase your rental property, it’s important for you to do your financial due diligence and ensure that you can pay a mortgage during vacancy periods. Don’t make the mistake of failing to do a simple cash flow analysis, and make sure to maintain sufficient funds to cover the mortgage payments when renters are few and far between.
Additionally, there is a list of things you can do to increase your chances of renting out quickly. First, as we’ve mentioned, you can be flexible with your rent price. Second, you can soften your pet policy to broaden your target audience. Third, you can slightly loosen restrictions on your lease terms on the results of tenant screening.
8. Not properly screening tenants
Many landlords make the mistake of not doing proper tenant screening. As anxious as you may be to get a tenant to move in and to begin paying rent, it is not worth it to rush signing on the dotted line of a lease agreement without checking a potential tenant’s references and other documentation.
To avoid being locked into an unpleasant rental agreement with a problematic tenant, it pays to perform a good and thorough screening process. This will save you from the stress, headache, and not to mention expenses that a bad tenant can cause.
Aside from credit and reference checks, make sure to ask the right questions to ascertain if your prospective tenant is a keeper.
To help you get started, here is our step-by-step guide on how to properly screen tenants.
9. Failing to properly claim tax deductions on your rental property
Rental properties have unique tax deductions that some investors (especially first-time landlords) are not aware of (e.g. depreciation). These tax breaks can be significant and can often draw the line between a negative cash flow and a positive one.
Before claiming any tax deductions on your rental property, make sure to seek professional advice from your accountant or a property manager to make sure you don’t run into trouble with the ATO.
10. Not treating it as a business
One of the biggest mistakes some landlords make is to treat owning investment properties as a hobby rather than a business venture.
While there is no harm in enjoying what you do, some people forget to take the business side of owning a rental property seriously and fail to achieve maximum return on their investment.
To avoid this, it’s crucial that you have a business plan and strategies firmly in place. Stay on top of what’s happening with your property, and work with professional advisors like accountants and financial planners to ensure you’re making the most out of your rental.
Real estate is a type of real property that refers to any land and its permanent improvement or structures that come with it, whether natural or man-made.
Tenant screening is the process used by landlords and property managers to do a background check on prospective tenants and assess their compliance with the lease agreement.