Here are the seven biggest mistakes landlords make – either because they are new and inexperienced or they are just plain bad:
1. Not Screening Your Tenants
In a recent article, I said the number one rule of successful landlords was “Screen Your Tenants.” Likewise, the biggest mistake of bad landlords is failing to screen tenants. The importance of proper tenant screening can not be overstated.
Good tenants will pay the rent every month and take care of the house. Bad tenants will pay rent late -- or not all – will destroy your house, and possibly damage you in other ways (like dragging you through the court system of causing you to begin drinking heavily or suffer a heart attack) that can cost thousands of dollars in damage, lost rent and eviction fees.
This error is usually committed by new, inexperienced landlords. They are eager to get the house rented as soon as possible because they are not collecting any rent. However, savvy landlords know it’s far better to have a property sitting vacant than to have the wrong people living in it. Taking the time to choose quality tenants will save you money in the long run.
How to conduct a thorough background check is beyond the scope of this article, but there’s lots of information available thanks to my friend with a one and 1,000 zeros. Please educate yourself and know the ins and outs.
You may want to consider a tenant placement service that will conduct background checks and supply you with reports. You still have the right to accept or reject any applicant. They typically charge the equivalent of one month’s rent for this service.
2. Renting the Home Before It’s ready
If there are any problems with the house, take care of them before tenants move in. Sometimes you may not be aware of problems, and they may not be readily apparent. Run all plumbing, electric, and appliances to simulate how they will be used once the house is occupied.
Make sure all faucets run properly, turn off and on, and all tubs and sinks drain properly. Test the showers and toilets. If a shower is not working correctly it could be a major repair if the shower diverter has to be replaced. Much better to do whole the house is vacant instead of after tenants move in – particularly if it’s their only bathroom.
Make sure all outlets work and are properly grounded. You can test outlets with an outlet tester such as the one pictured here. It’s from Harbor Freight but Lowe’s and Home Depot sell similar products:
They have a label indicating what the colored lights mean. The most common problem is open ground. If you have an older home, you may have some two-wire branch circuits, meaning there is no ground wire. Contrary to what many Landlords and Harry Homeowners do, it is not acceptable to install three-prong outlets to these circuits. The tester in that case will reveal there is an open ground. (You can, however, install GFCI outlets since they do not require a ground).
Testers come with or without a GFCI (ground fault circuit interrupt) button. I recommend using one with the GFCI button in order to easily test GFCI outlets.
3. Ignoring Your Properties
Similar to last item (renting the property before it’s ready) this mistake is the result of landlords ignoring problems because they don’t want to devote the time or expense to fix them. Some landlords feel they will maximize their profits in this way. On the contrary, it will wind up costing more money in the long run, so I recommend taking care of repairs promptly. For example, a leaky pipe can cause mold, floor and wall damage, etc … if left unrepaired.
You should also conduct periodic inspections of your property. Of course you want to respect your tenants’ privacy, but you also need to be able to check on your investment. Your rental agreement should have a clause granting you access for such inspections with proper notice (usually 24 hours). I recommend visiting all of your properties at least every few months.
4. Asking Too High Rent
Do you remember the candidate from the Rent Is Too Damn High party? Would you want to be his landlord?
Obviously you want to maximize your profits, but if the rent you’re asking is too high it can cause several problems. First the property may sit vacant longer than necessary. Second you may attract unqualified applicants. They tend to be desperate because they have few options. High rent is not an issue for them, especially if they’re not planning to pay!
Good tenants, on the other hand, can afford to be selective because they do have options. They have decent income, references, rental histories, etc …, and will choose the best home at the best value.
Do some research and find out what rents are for comparable homes in your area. Then price your rental property at the lower end of the range.
5. Not Using Proper Forms or Keeping Proper Records
It’s all about that paperwork
Inexperienced landlords use lots of improper forms. Each state has its own specific rules, regulations and laws specifying forms you are required to provide your tenants. For example, here in Maryland, all tenants must be provided with the “Notice of Tenants Rights,” and “Protect Your Family from Lead in Your Home” brochure.
States and municipalities also often have their own requirements for leases and Rental Agreements. Many landlords buy generic leases online, or download free ones. These agreements could (and often do) violate Maryland State, Baltimore City, or Baltimore County law. Take the time to find a quality lease or Rental Agreement that complies with the laws in your area and one that also addresses various issues to protect you as the landlord.
6. Not Collecting Adequate Security Deposit
There are a number of mistakes that can be made with security deposits. Using that money for your own personal needs is a big one, as well as not using a trust account. Another mistake is not taking a big enough security deposit. Always get all the security deposit and the first month’s rent before you allow anyone to move in. A common rule is the equivalent of one month’s rent as security deposit. Never allow someone to pay half their security deposit now and half later. You don’t want a tenant who can’t afford to pay up front. Collect first month’s rent and security in the form of a money order or cashier’s check. Starting on the second month you can accept personal checks.
7. Over-Leveraging Your Properties
Taking out a loan for the purpose of buying rental properties may seem like a great idea. However, you must be careful not to over leverage yourself out of any monthly cash flow. If your mortgage, escrows (taxes/insurance) and repairs are barely covered by rent, you could lose significant money if you have a long vacancy or a tenant damages the property.
In order to earn cash flow, the rent must far exceed total expenses, which consists of mortgage payments, property taxes, repair expenses, etc …
Many landlords underestimate these expenses or fail to account for some hidden ones – like vacancy, repair and maintenance rates.
Bonus Mistake: Not Filing Evictions Quickly
You may feel sorry for tenants, but don’t make their problems your problems. This is a business, and should be treated as such. As soon as tenants are late with the rent, put them on notice. Tell them rent is due by the Fifth and it’s company policy to file with rent court on the Sixth. It’s nothing personal. If you let them get one or two months behind, that’s one or two months longer it will take to evict and one or two month’s worth of additional rent you have lost.