Purchasing a rental property is the perfect way to diversify your investment portfolio and start accumulating long term wealth. There are a number of benefits that accompany owning a rental property, most of which involve the passive income that comes with the investment.
While passive income sounds like an easy way to make money, there is a lot of time and effort that goes into maintaining a desirable property. The two most important questions every individual considering a rental property needs to ask themselves is whether or not they should invest in some kind of rental property management company or simply be their own landlord and how they plan to finance the property.
It is crucial that any rental property owner treat his or her investment as its own business. Therefore, avoiding common mistakes and attracting respectful tenants are aspects of the business that cannot be over looked.
Know how to spot the regular signs of a poor-quality tenant and learn from the mistakes many rental property owners make on a continual basis.
- DODGING DUE DILIGENCE
- Don’t forget to research the local market.
- Avoid making hasty decisions.
- Make sure to review a contract thoroughly before you sign.
- UNDERESTIMATING REPAIR AND OPERATING COSTS
- Your average operating expenses per month should be 35% to 80% of your total rent collection (total expenses ÷ total rent).
- Beware: If you end up with a number under 35%, it is likely you’ve miscalculated.
- Maintenance and miscellaneous costs are typically 1% of the property value per year ($1,800/year spend on maintenance costs for a property worth $180,000).
- ASKING ILLEGAL INTERVIEW QUESTIONS
- Don’t run the risk of giving a person grounds to sue you for discrimination.
- Remember The Fair Housing Act of the Civil Rights Act of 1968.
- Do no deny a tenant’s application based on race, color, religion, national origin, sex, marital status, handicap or family status.
- EVADING LOCAL HOUSING CODES
- These codes differ based on the city and state of your rental property.
- Codes typically cover health inspection requirements, registrations fees, and necessary permits.
- Refusing to uphold legal codes gives tenants the right to break lease agreements.
- NOT PUTTING IT IN WRITING
- You MUST keep written documentation of all interactions with tenants.
- Written documentation helps to enforce lease terms and ensure tenant privacy.
- Keep copies of phone conversations and emails to be able to support your allegations.
- BEING TOO LENIENT
- Don’t get caught up in being “Mr./Ms. Nice guy. Remember, you are running a business.
- Never bargain with tenants. Be sure to stick to your rules regarding late fees.
- Deliver pay or quit notices on time and follow through with penalties.
- USING GENERIC RENTAL FORMS
- Downloading a generic lease agreement from online can lead to legal problems in the future.
- Online lease agreements will not address the unique features of your property.
- Customizing your lease agreement will help to mitigate battling with tenants about what they can and cannot do.
Your rental property is a huge investment. There a plenty of risks, but the rewards could be even greater. Every serious rental property owner should consider hiring a knowledgeable property management company to help reduce those risks and let you only collect the rewards.