Top 5 Landlord Mistakes & How You Can Avoid Them
Being a landlord isn’t always easy. Between trying to stay on top of your finances, rental maintenance and repairs, and reducing tenant turnover, it’s all too easy to make mistakes that could cost you. Whether you’re a first-time landlord or a seasoned pro, read on to find out the top five mistakes landlords make and how you can prevent them.
Insufficient Tenant Screening
There’s nothing worse than bad tenants. They can cause problems with neighbors, damage property, or refuse to pay rent on time (or at all). One of the best ways to avoid bad tenants is through exhaustive tenant screening. Unfortunately, many landlords aren’t doing much more than a background and credit check. Thorough tenant screening should include all of the following:
- Credit score
- Debt-to-income ratio
- Rental history
- Criminal background
- Identity verification
- Employment verification
The more you know about your tenant, the better of an idea you’ll have as to how reliable they are at paying rent on time, holding a steady job, staying out of legal trouble, and whether or not they have debts that may keep them from paying rent regularly.
Not Having a Reserve Fund
Reserve funds are crucial if you own rental properties. There are many unexpected expenses that can come up when you’re a landlord, from costly repairs like a full HVAC replacement to everyday maintenance to loss of rental income due to high tenant turnover or high vacancy rates. Unless you bought your property in cash, chances are that your monthly rental income is paying for at least part, if not all, of your mortgage. Fall behind on those payments and you might be looking at a foreclosure. A reserve fund protects you from these kinds of unexpected expenses.
How big your reserve fund is should depend on several factors, such as how many properties you own, what type of properties you own (a single-family home is going to need more than an HOA-backed condo, for example), and how risk-averse you are. $5000 per property is a solid reserve fund. Others prefer to calculate reserve funds by the amount of 3 or even 6 months’ rent. If possible, try to contribute 10% of your monthly rental profit into your reserve fund.
Vague Lease Agreements
It is also important to write a comprehensive lease agreement. Even if you are leasing to a good friend or even a relative, it is paramount that you and your tenant both understand what your expectations of each other are for the duration of the lease. While verbal lease agreements are acceptable in some states, it is highly advisable to always have a written lease agreement. Make your lease agreement as detailed and exact as possible. Here are some important clauses to include:
- State-specific disclosures
- Rent due date & acceptable forms of payment
- Grace periods and late fees
- Conditions relating to the security deposit
- Pet policy (including any monthly fees and deposits)
- Overnight guests / subletting policy
- Maintenance responsibilities of tenant / landlord
Poor Record Keeping
Tracking your operating expenses and rental income is imperative as a landlord, especially come tax season or in case of a potential audit by the IRS. You should retain and organize all pertinent documents, with separate files for each rental property you own. You should keep both paper and digital copies of utility bills, rent payments, repairs and maintenance performed by contractors, and business-related expenses including money spent on travel (including to and from the rental property), security deposits collected, interest paid on business credit cards, and any fees you may have paid to realtors, insurance agents, accountants, or lawyers.
Landlords should also keep detailed records for their own peace of mind. Make sure copies of your property deed, lease agreements, home inspection reports, and mortgage documents are easily accessible. You can use software like QuickBooks or the Tellus superapp for effective document management.
Legal Errors
As a landlord, it’s important not to violate any federal or state laws while operating your rental business. You should read up on your local landlord-tenant laws for a better understanding of both your rights and responsibilities. Be sure not to ask any discriminatory questions while screening potential tenants. The federal Fair Housing Act prohibits discrimination based on race, color, religion, national origin, sex or gender, disability, or familial status.
It’s also important to uphold the implied warranty of habitability by making sure rental units are properly maintained and repaired as needed. Failing to provide a safe living environment for your tenants, violating their right to privacy, and not following correct eviction procedures can all spell legal trouble for landlords.
Final Thoughts
Becoming a landlord can be a rewarding experience, but it can also be overwhelming if you don’t understand what you’re getting yourself into. You can avoid many common landlord mistakes by doing your research and exercising caution. After all, although your goal may be passive income through real estate, it’s important to take a proactive role in the process.
