After spending much of their lives as tenants, millions of people dream of becoming a landlord in their own right, and earning a monthly cash flow while a stranger pays down the principal balance on their mortgages. With one part work and one part expertise, this dream can become a financial reality, and while I can’t help you with the work itself, hopefully you can skip the most common mistakes new landlords make.
Don't Be Lazy
New Landlord Mistake 1: Too Much Mortgage Debt
The natural inclination is to borrow as much as the bank will lend, whether it’s 50% or 95% of the value of a property. However, there are several good reasons you want to minimize the amount of money you owe on your mortgage, and making sure that your combined predictable monthly expenses (principal, interest, taxes, insurance) is less than half of the rent you receive. First of all, you want to be able to pay the mortgage when your property (or properties) is vacant, which happens more frequently than most new landlords imagine. Second, you’ll need that cash flow to help pay for the unexpected bills that come along, including unforeseen repairs and maintenance, lawsuits, etc.
New Landlord Mistake 2: Using a Generic Lease Agreement
Using a generic lease agreement, whether from an office store or some boilerplate template scrounged online, is almost never legally sufficient, and can render your lease unenforceable. Each state has regulations about how much you can charge for late fees, security deposits, etc, plus they often have specific language that must be included. Hiring a real estate attorney is one option, or you can go to a landlord resource website (such as EZ Landlord Forms) that leads you step by step through the process of building a lease agreement.
New Landlord Mistake 3: Failing to Adequately Screen Tenants
Many new landlords fail to do the hard work in sorting through the bad apples in trying to find a good tenant. Always charge a rental application fee, and use it to pull credit reports and eviction background checks. People tend to be either good about paying their bills or bad about paying them, and this is not something that changes easily, so find out what their history is, as it will repeat.
Bad Tenant
New Landlord Mistake 4: Ignoring your Rental Properties
Landlords mostly want to simply cash a check each month and not have to think any further about their rental properties, but the fact is you need to be proactive and aggressively reactive with your rental properties. If your lease agreement is expiring, send the tenants a notice asking for a written notice of their intent to leave or stay. If a tenant calls complaining of a leak in the basement, send a handyman to check it out. If there’s an ongoing dispute between you and the tenant, either resolve or it or discontinue their lease, as these disputes have a bad habit of becoming legal disputes.
New Landlord Mistake 5: Failing to Evict Quickly when Tenants Violate the Lease Agreement
The eviction process takes FOREVER, so you need to get started the moment a tenant is late on rent. They will beg, cajole, and threaten you, but you MUST be firm and fast when filing eviction, because it can take several months from start to finish. They will have plenty of time to bring their rent current, before the sheriff finally lets you into the property, but in the meantime you’re stuck paying the bills on the lease.
These are five easy concepts, but they are harder to actually follow through on. Don’t learn these lessons the hard way; use an enforceable, state-specific lease agreement from the start, screen tenants well, evict quickly, reduce mortgage debt, and don’t procrastinate when it comes to your rental properties!