Owning a rental property can be an exciting way to build wealth. You’re not just earning regular cash flow as the rent payments come in; in most markets, you’ll also experience long-term appreciation as time goes on. But while the rewards are promising, many first-time landlords quickly discover that the first year can be a rollercoaster. Unexpected costs can hit you out of nowhere, difficult tenants can present a challenge, and maintenance could prove to be more time-consuming than you had previously thought.
For landlords, it’s important to have a plan to mitigate potential issues that could arise. Being aware of common mistakes and pitfalls can help you to mitigate or even sidestep a number of issues. With the right plan, you’ll be armed with practical tips to handle potential issues effectively, helping you to set yourself up for success with your rental property.
Navigating the Challenges of Your First Rental Property
Mistake #1: Failing to Screen Tenants Properly
One of the most expensive mistakes a new landlord can make is rushing, or even skipping, a thorough tenant screening process. It’s tempting to accept a tenant based on a “good vibe” or verbal assurances, but that can spell trouble if you haven’t done your due diligence.
The Risks of Not Screening Tenants Properly
Without proper vetting, you might end up with an unqualified tenant. This could mean issues like late payments, property damage, or even an eviction. Evictions can be costly and time consuming. Some evictions take a few weeks while others end up taking more than a year.
What to Do Instead
Make sure you have a solid, fair process for everyone who applies. Start with a thorough background check that includes looking at credit history, rental history, capacity to pay, and criminal records. Don’t forget to read up on your state’s rules and the fair housing laws before you start screening to ensure you treat all applicants equally and fairly. If you don’t have the time or experience to do this yourself, consider outsourcing the process to a property management company. Just be sure that the company is experienced and reputable and also complies with fair housing laws and screening regulations.
Mistake #2: Underestimating Maintenance and Repair Costs
A survey by Porch says that the average American homeowner spends around $16,000 annually on maintenance. If you’re unprepared, these costs can take you by surprise, especially if you haven’t set aside enough reserves.
What Landlords Forget About Maintenance Costs
Some landlords assume that once tenants move in, the major expenses will be limited to rare, large repairs like a new roof or HVAC replacement. New investors may neglect routine upkeep like appliance repairs, plumbing issues, and landscaping. They may also forget to budget for periodic replacements, like water heaters to kitchen appliances that wear out over time. The result? Unexpected repair bills start piling up, eating into your profits.
What to Do Instead
Regular property inspections can help you identify and address minor issues before they turn into expensive repairs. Schedule semi-annual or quarterly inspections to stay on top of maintenance needs and to prevent costly problems down the line.
A good guideline is to set aside 1-3% of the property’s value annually as a maintenance fund. For example, if your rental property is worth $300,000, you should reserve at least $3,000-$9,000 per year for repairs and maintenance. This fund can help cover routine maintenance (e.g., gutter cleaning, HVAC servicing) as well as unexpected repairs (e.g., roof leaks, broken appliances).
Here are more tips on How to Budget Maintenance for Your Rental Property.
Mistake #3: Miscalculating Cash Flow and ROI
One trap that new landlords often fall into is underestimating the full range of expenses that come with owning a rental property. If you don’t do the math right, expenses like maintenance, repairs, taxes, insurance, and vacancies could surpass your rental income.
A lot of first-time investors could end up dipping into personal savings or struggling to break even if they didn’t plan for all these expenses from the get-go. In the end, what seemed like a great investment can quickly become a drain on your wallet and energy.
What to Do Instead
Before investing in a property, you’ll want to run the numbers to see whether it checks out as an investment. One metric you’ll want to calculate is net income. To properly calculate cash flow, subtract operating expenses from your gross rental income. The formula looks like this:
Gross Rent – Operating Expenses (property taxes, insurance, management fees, maintenance, etc.) = Net Income (your monthly cash flow).
For example, if you earn $2,000 in monthly rent but spend $1,200 on operating expenses, your cash flow will be $800 per month. You’ll want to determine what a healthy net income looks like and ensure that you only invest in a property that meets your criteria.
Proper budgeting and implementing small changes could also help you to improve cash flow if you’re in the red. Cutting back on operating expenses by $50 or increasing rent by $100 can make a big difference over the course of a year.
Mistake #4: Setting the Wrong Rent Price
Getting the rent price right is one of the most important decisions you’ll make as a landlord. A rent price that’s out of sync with the market can lead to longer vacancies, which directly impacts your bottom line. On the flipside, underpricing could mean leaving money on the table and attracting tenants who may not treat the property well.
What to Do Instead
Don’t base rent pricing on your emotional attachment to the property or because you’re trying to undercut competition. You can misjudge what your property can command if you skip the research or rely solely on personal expectations. It’s also a mistake to ignore factors like property condition, location, and local demand, all of which significantly impact rental rates.
Tips to Determine Market-Appropriate Rent
Here are some ways to help you hit that sweet spot:
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Research comparable properties (similar size, condition, and amenities) in your neighborhood and see how much they’re going for.
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Use tools like Rentometer or Renters Warehouse Research Center to get a market-driven price.
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Consider your property’s condition and location. Proximity to schools or amenities like parking can justify a slight increase.
Still not sure how much rent to charge? See A Guide to Setting Rental Prices to get you started.
Mistake #5: Not Knowing Landlord-Tenant Laws
As a new landlord, you probably didn’t sign up to become an expert on the law. But landlords face real risks when they don’t comply with rental housing laws. You might not realize that seemingly minor actions, like showing up for an unannounced inspection or delaying necessary repairs could have serious legal consequences.
Another rookie landlord blunder is assuming that landlord-tenant laws are similar across the country. Laws vary dramatically by state and by city. In California, for example, eviction laws are notoriously strict, while each state has different limits on security deposits.
What to Do Instead
Here are some ways you can help protect yourself:
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Customize your lease agreements to meet your state’s specific requirements, as generic templates may miss important details.
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Understand the legal limits on security deposits and the timeframe for returning them after a tenant moves out.
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Learn and follow the correct eviction procedures to avoid wrongful eviction claims.
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Familiarize yourself with your state’s rules about giving notice to your tenant before visiting your property. This is typically 24 to 48 hours.
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Ensure that your advertising and tenant interactions comply with fair housing laws to avoid discrimination and legal trouble.
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If you’re unsure about local regulations, talking to a real estate attorney or hiring a professional property management company can be a wise investment.
Mistake #6: Not Factoring In Vacancy Rates
Every landlord dreams of 100% year-round occupancy rates, especially if they’re in a hot rental market. But underestimating the reality of vacancies is where a lot of first-time investors go wrong. Let’s say you expect $1,500 in rent every month. One month of vacancy means $1,500 straight out of your pocket, which can quickly throw off your cash flow for the year. You’ll also still be paying for taxes, utilities, and other fees. Another mistake is not accounting for turnover costs, like cleaning and minor repairs in between tenants, which can prolong vacancies even further.
Over time, these vacancies can eat into your profits, especially if you haven’t budgeted for them. Common causes of unexpected vacancies include failing to research local market conditions or setting the rent too high, which can lead to longer vacancy periods.
What to Do Instead
To protect your investment, budget for vacancies by setting aside 8-10% of your gross rental income each year. When you do experience vacancies, act fast and try these tips:
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Offer seasonal promotions like a free month’s rent to attract tenants during slow periods.
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Improve curb appeal to make your property more attractive. Sometimes, a quick refresh can make all the difference.
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Adjust rent slightly during high or low seasons based on market demand to ensure quicker tenant turnover.
Looking for more ways to reduce vacancies? Here are some more tips on how to reduce vacancy rates.
Mistake #7: Trying to Self-Manage Without Proper Experience
New landlords may underestimate the time and effort required to manage a property effectively. After all, how hard could it be to collect rent and call a plumber when things break, right? But soon enough, managing the property becomes more than just a part-time job. You may end up overlooking critical tasks like regular property maintenance or urgent tenant complaints because you’re overwhelmed or busy with other responsibilities. It’s a fine line to walk, and without experience, you can slip into bad property management practices. Taking on too much yourself can quickly lead to burnout, missed maintenance issues, non-compliance with landlord-tenant laws, and unhappy renters.
What to Do Instead
A professional property management company can handle many day to day tasks like tenant relations, rent collection, property maintenance, and legal compliance. Working with industry professionals can save you time and spare you from the hassle of managing these tasks yourself. Not sure if outsourcing property management is right for you? Here are some ways to help determine if it might be time to bring in the pros.
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You live far away from your rental property.
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You’re short on time due to work or family commitments.
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You’re unsure about local rental laws or maintenance practices.
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You’re getting a lot of tenant complaints or lagging on your maintenance schedule. These are red flags that you might be stretched too thin.
Final Thoughts: Learn From Mistakes and Grow as a Landlord
Becoming a successful landlord doesn’t happen overnight, and your first year is bound to come with some learning curves. But by watching out for these common mistakes, you can protect your investment and make things a lot smoother. Remember, it’s all about planning ahead, staying on top of your expenses, and keeping your tenants happy. If you ever feel overwhelmed, don’t hesitate to seek advice or bring in professional help when needed. Rental investing is a journey, and the more you learn along the way, the better your chances of long-term success.
Let the Renters Warehouse team of professional landlords take some of the stress off your hands. Check out our 24/7 hassle-free property management services today.
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