Landlord small rental unit

Common Mistakes Landlords Make

Updated January 1, 1 . AmFam Team

Getting into the real estate investment market can be a great way to diversify your investment portfolio. But without understanding these issues, you could be at risk. Here’s a list of common mistakes landlords make that decrease profits.

They Don’t Insure Their Property Correctly

Improperly insuring your property can be a big issue. When the unexpected happens, landlords may not be able to pay out of pocket to return the rental to a habitable condition. Because novice and seasoned landlords alike can all benefit from having the right policy in place, be sure to contact your agent (Opens in a new tab) and learn about how American Family Insurance can help to insulate your finances. You’ll feel more confident knowing that you’ve done all you can to protect everything you’ve worked so hard for.

They Fail to Calculate Their Expenses Correctly

Determining if investment properties will pay off can be illusive. Many first-time rental property investors fail to do the math when calculating expenses for a rental property. And when a second mortgage comes into play, the finances, operational costs and tax expenses need to be carefully considered before taking action.

They Don’t Take the Tenant Screening Process Seriously

Finding the optimal tenant for your investment is critical to its continued success. That’s why we’ve partnered with TransUnion’s SmartMove (Opens in a new tab) — which performs a thorough review of your prospective tenant’s history, delivering you a “Tenant Score” of the applicant. Without it, new landlords may sign with unreliable tenants who have a checkered past.

They Disregard Small Maintenance Issues

That small leak in the shower may wreak havoc on your rental unit and your finances. Put together a list of go-to contractors that you can rely on when issues arise. Get a warranty and keep your unit well maintained.

They Let Units Stay Vacant Too Long Between Renters

Landlords may take a half a month between tenants and fix up the rental home or unit. It may not seem like much but it adds up quickly. If rent’s $2,400 per month, that’s $1,200 in lost income, which doesn’t even consider the additional expense of fixing up the place. Schedule your upgrades, planning smaller projects while the unit’s occupied.

They Invest In the Wrong Neighborhood

By not vetting the area around the rental property, new landlords have invested in the wrong neighborhood. As housing prices decline locally, reasonable rental rates are out of reach for tenants and the space sits vacant for months.

They Invest In Upgrades That Don’t Increase Rental Income

Discuss your plans with a realtor to get a feel for how upgrades will impact the monthly rental income. If cosmetic upgrades are done — like removing popcorn ceiling — critical funds for a stove that suddenly needs to be replaced may not be available. Schedule high cost purchases and budget upgrades carefully.

They Don’t Fine Tenants According to the Lease Agreement Terms

The terms of your rental agreement are there for a reason. When followed closely, they can push tenants to adhere to other terms in the lease as well. Defer to state and local laws that govern your interactions with tenants.

They Fail to Perform Inspections on Units

After the security deposit’s returned, some landlords find the space riddled with costly repairs that have to be paid out of pocket. Perform a thorough move-in and move-out inspection with every tenant. Keep photos and written documentation on the condition of the property to better track issues that exist in your rental units.

They Don’t Document Tenant Encounters Correctly

Landlords that don’t document tenant interactions may find it hard to prove their case in tenant/landlord disputes. Document encounters so you’ll be able to defend yourself in small claims court. If you have no paper trail, you may be delaying or preventing the eviction process from starting.

They Fail to Require Enough Security Deposit to Cover Damages

Rental income is only valuable when you are not forced to dig into your own personal finances to repair damages which won’t be covered by a security deposit. Even more of a problem, landlords may find the security deposit alone is not enough to pay for costly repairs required to make the space to a habitable.

They Don’t Take Advantage of Tax Deductions

Rent payments may not be enough to turn a profit. One way real estate investors are increasing revenue is by leveraging all available tax deductions. New laws on the books since late 2017 have changed the way businesses can write off purchases and net profits. Get with a CPA and carefully review your deductions to be sure you’re increasing profits and maximizing benefits.

They Don’t Adjust Rental Prices According to Inflation Rates

When it’s time to renew a lease, raising the rent can break the deal. But landlords may fail to realize that inflation results in higher prices to manage the property. When a landlord raises prices, they’re transferring that burden onto the tenant. Maintain consistent cash flow when these costs increase by adjusting the rental price accordingly.

Their Rental Fails to Meet State and Local Housing Codes

If landlords fail to maintain the habitational requirements of a rental unit, tenants may have the right to sue for compensation due to damage or injury they’ve suffered. Be sure the roof is not leaking and that mold is kept to a minimum. Verify all utilities are on, and appliances are operating as designed. Windows and doors should fully seal the elements out of the living space as well.

They Fail to Start Evictions in a Timely Manner

Delaying an eviction may be inviting a problem tenant to squat in your rental for several additional months. You may need a lawyer to pursue the matter in court. Instead, set due date reminders in your calendar, and prepare legal documents ahead of time. That way, they’ll be ready if you need them.

Check In With Your Agent Annually

Be sure to mark your calendar for an annual review. If you make updates that impact the value of your property, it may important that these changes are noted in your policy. Our agents will help you make the most of your insurance and can help to bundle your coverage, and that can save you money.

This article is for informational purposes only and is available through different sources. This information does not, and is not intended to, constitute legal advice. You should contact your attorney for legal advice specific to your situation.

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    Class B neighborhoods

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    Calculate one year’s rent

    If you’re collecting $2,000 per month, you’ll have twelve payments at the end of the year, or $24,000. This figure is your gross annual income.

    Account for half a month’s vacancy

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    Factor in operational costs

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    ---------------------  =  0.0685 or 6.85 % - That's your cap rate.

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