Your property is one of your biggest assets. It will enable you to leverage an investment and grow your capital. In order to succeed, you need to stop thinking like a homeowner and start thinking like a business owner. While it’s clear that owning rental property is a smart financial investment, many do not realize the complexities involved in managing their real estate properly. We’ve compiled the top common mistakes you must avoid in order to reduce your headaches and capitalize on your investment.
Common Mistakes for Property Owners to Avoid
1. Doing it Yourself
New investors often attempt to manage their property themselves. This usually ends up costing them more in the end. You may not be able to comprehend the fine print found in most purchase contracts. An experienced professional, will be able to go through the documents with you while keeping your rights and obligations in mind.
2. Hiring a Real Estate Agent to Manage Your Properties
As competent as they are in selling you a home, real estate agents do not specialize in property management. Many agents do not have the systems and the team in place to be able to manage your property successfully. Most are also not educated in the many landlord-tenant laws when it comes to dealing with rental properties.
3. Hiring a Company That Deals in Leasing and Not Management
Perhaps the biggest mistake you can make when owning real estate is to hire a leasing company to manage your property. Companies who only specialize in leasing have no incentive to find the best tenants.
Consider hiring a property management company. With a team in place, all of your properties are correctly handled. You are then better equipped to deal with your regular business operations while the daily tasks are left to the property specialists. When you own multiple properties, it can be difficult to handle all the issues yourself. You’ve got tasks like dealing with tenants to maintenance and repairs.
4. Not Having the Proper Property Insurance
Considering the cost of insurance, many investors will opt to get the minimum amount to save a few bucks. This mistake involves failing to obtain the proper insurance coverage. As a property owner, you must make sure to have the right types of insurance on your rental property. Try to avoid getting the wrong type of insurance coverage, or the wrong amount of coverage.
Consider getting property insurance and liability insurance. In fact, getting the right insurance can save you hundreds of dollars. It is crucial that you understand the different options available to you to mitigate coverage holes. Investment insurance is much more complex than your typical homeowner insurance.
Find time to discuss your insurance options with a licensed insurance professional that understands property investment.
Here is a list of essential coverage:
- Property Manager Listed as Additional Insured
You would not want to be held liable for negligent acts or errors committed in the management of the property. Just as the property manager does not want to be forced to cover attorney and other defense fees out of pocket is any suits arise. Putting your property manager as additional insured compliments their insurance policies. It helps against claims expenses, not of their doing.
- 100% Replacement Cost
According to State Farm, replacement cost is the cost necessary to repair or replace your entire home. When you insure your home for its replacement cost, your insurer will reimburse you for the cost of rebuilding or repairing your home. It is based on the size and structure of the home that was lost or damaged.
- Landlord Liability Protection (AKA General Liability)
This type of coverage is standard in most landlord insurance policies. It provides coverage for your expenses if you are found legally responsible for someone’s injury on your property. It also covers you if you are required to pay for damage done to someone else’s property.
- Accidental and Sudden Discharge of Water or Steam
The most common issue is someone’s pipe bursting and no one is home for a couple of days. Pipe bursts and other common plumbing issues can cause extensive water damage to a home or business. This is not typically covered by your basic policy.
- Dwelling Vs Homeowners Policy Get a dwelling insurance policy for your property instead of a homeowners policy. Dwelling insurance is appropriate in a variety of circumstances other than coverage of an insured’s primary residence. Vacation homes are one of the most common situations, as well as rental properties.
- Vacancy Clause Unoccupied and vacant home insurance are specialty insurance products that are intended to provide financial protection from damage or loss of a home that is uninhabited. Typical homeowner’s insurance policies won’t cover fire, vandalism, liability or other types of claims on an unoccupied or vacant property.
- Vandalism and Mischievous Misfit (VMM) Most dwelling policies exclude this coverage. Vandalism and malicious mischief insurance is a type of insurance coverage that takes into account losses sustained because of vandals.
- Loss of Rents If your property is significantly damaged due to a covered claim, your tenant will move out and not pay rent. Rent loss insurance reimburses a landlord for lost income while the property is being repaired or rebuilt under a loss covered by property insurance.
5. Not Updating Your Mailing Address with the Home Owners Association
Failing to update their mailing address with the Home Owners Association (HOA) is a common, but costly mistake that investors make. HOA’s can charge large fines if HOA fees are not paid, are late, or if HOA violations go unanswered. As a result, owners get charged with massive late fees, attorney fees, and could end up facing possible foreclosure. If your property is in an HOA, you need to contact them to ensure they have your current mailing address and phone number.
6. Being Friends with Your Residents
Its an unwritten rule that you need to be courteous to your residents. However, it is also implied that you do not become friends with your residents. Landlords who become friends with their residents tend to give them preferential treatment. Things can get overlooked such as late rent payments or evictions that aren’t filed. And there may be potentials for lawsuits if other residents find out you are not treating all renters equally.
7. Not charging Fair Rental Fees
By trying to charge above-market rents, you end up losing out in the end. A vacancy is your biggest liability. Charge fair rents, treat your tenants with respect and respond as quickly as possible to their needs. A property may be vacant an extra month or two and this is not something that you can afford.
8. Not Being Clear with Tenant Rules & Regulations
You will need to be crystal clear with your tenants when it comes to the guidelines and your relationship. It is important that the lease/rental agreement is acknowledged by the tenant, especially the rental rules. Be fair and enforce guidelines for all your tenants. It is also key to have a monitoring and communication system in place to ensure that your tenants understand and abide by the rules.
9. Refusing to Settle a Dispute with a Tenant
Rather than drag a dispute out to court, knowing that the landlord-tenant laws can be unfair to owners, it’s almost always better to just settle. Tenants often have access to “legal aid” lawyers who will fight you with tax-and-charity dollars. You may have the upper hand and win the case, but after thousands of dollars in costs you may have trouble recovering. Try to calmly resolve any situation and maintain a good landlord-tenant relationship.
10. Hiring Unprofessional Contractors or DIY to Save Money
Maintenance is your responsibility and you might have to hire a team. If a renter calls you reporting mold or a broken AC issue, respond to it quickly and professionally. Don’t try and cut corners and do it yourself just to save some money.
You could end up with a bad reputation if you do not take care of your tenants maintenance needs. Take care of your properties, after all, they are yours. Even if you know what you’re doing, the time you’re wasting fixing up your properties could be better spent on other important tasks, like growing your business.
11. Failing to Screen Tenants
Don’t be desperate to fill in the properties. This is another huge mistake for first-time property owners. When you are desperate to fill a rental, you will make poor decisions. It’s a better idea to take the time to find a good-quality renter than just fill in the spaces.
Unfortunately, tones of landlords across the country fall victim to the eviction process following an altercation with their tenants. They most often end with them refusing to pay rent. However, with a proper tenant screening process, it will help you find qualified, loyal and long-term residents. That is well worth the time and expense. Don’t get stuck with unreliable renters or wait for an eviction to happen.
12. Allowing Tenants to Handle Their Own Repairs
Even if the tenant happens to be skilled at simple maintenance repairs, hire a professional. If something were to happen to the renter in the process, you are liable. You also run the risk that the renter does a careless job, causing more damages and an added expense. Stick to hiring professionals.
These are just a few tips for beginning property owners. Whether you own just one property or a hundred properties, make no mistake, you own a business. Failing to plan is planning to fail. Hiring someone to help manage your property investment is always a good idea.