August 9, 2024 | 2.5 Minute Read
Real Estate Investing, Rental Property Tips, Residential Real Estate, Landlord Advice, Tenant Screening, Property Management, Investment Mistakes, Rental Income Strategies, Real Estate Maintenance, Financial Planning, Rental Agreements, Vacancy Planning, Rent Pricing, Real Estate Survey 2024.
To avoid the common pitfalls and protect your investment, here are six mistakes you want to avoid:
Poor tenant screening
Cutting corners on background checks, credit reports, and reference calls to save a few dollars can lead to significant financial losses. Tenant lying on their application, using a friend as a landlord reference, no history of renting previously, eviction, foreclosure, and bankruptcy are all red flags you need to avoid. Reject these tenants. Hard stop.
Not budgeting for maintenance
Rental properties require continuous upkeep. Many new landlords overlook this reality, thinking that their investment will take care of itself. Ignoring small issues like a leaky faucet or a minor roof leak can lead to significant problems down the road. A $100 repair today could turn into a $1,000 water damage issue if left unaddressed. We recommend setting aside 10% of the monthly rent for ongoing maintenance costs.
Inadequate rental agreements
While it would be ideal if everyone honored their word, relying on verbal agreements can lead to serious issues. Without a formal lease, landlords may struggle to enforce rules or evict problematic tenants. A legally binding lease is essential to protect both parties and prevent disputes. You need to have a really solid lease that legally protects you and make sure you consult with an attorney to review it.
Not planning for vacancies
New landlords often forget to account for potential vacancies when calculating rental income, leading to financial strain. Mortgage payments, insurance premiums, and utilities don’t stop just because your property is unoccupied. You should set aside 5% of your monthly rental income to use as a rainy day fund when the current tenant eventually vacates. This should cover you for loss rent, cleaning and minor painting. If your property is in a lower income neighborhood with less quality tenants, you may need to set aside a higher amount of 10% or more to cover additional costs.
Managing properties
Managing a rental property can be more time-consuming than anticipated, especially if you handle maintenance, repairs, and tenant relations yourself. This time commitment can come at the expense of other income opportunities: Spending 30 hours a week managing a property takes time away from other potential earnings. Ensure you fully understand the time commitment before diving in. Otherwise, hand the property off to an experienced property management company. Hiring a property manager will cost you 8%-10% of the monthly gross rent.
Setting the rent too high or low
Finding the right rent price is crucial. Many novice investors rely on outdated data or gut feelings, which can lead to costly mistakes. Use up-to-date rental market data to set the optimal price. Use Zillow Rentals and Rentometer.com as your baseline for establishing your initial rent. Consult with real estate agents or a property management company in the area to solidify your rental price before marketing begins.
Setting rent too high can lead to vacancies, while pricing too low may result in missed profits or even a failure to cover costs. Real-time data analysis can help maximize rental income and boost annual returns by up to 12%.
A good rule of thumb is to budget approximately 25% of your gross monthly income for all expenses. The balance is your realized net profit.
By avoiding these common mistakes, you can increase your chances of success and ensure your investment in residential rental real estate is both profitable and sustainable.
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