Rental properties remain an excellent income generator, whether the economy is good or bad. However, in order to maximize that income, there are 7 common pitfalls that should be avoided as a rental property owner.
1. Under-capitalization – While many of the expenses related to rental properties are generally recognized, landlords often fail to add in the costs of maintenance and repairs, the unknown expenses. A common practice is to deduct 25% off the top, using the remaining 75% minus known expenses in calculating the actual income potential. Adequate funds should also be set aside to cover any loss of rental income should it occur.
2. Inadequate Tenant Screening – Probably the most common mistake made by landlords is the failure to do an adequate screening of potential tenants. This process should begin with submission of a comprehensive application. Ideally there should be verification of income, employment, and rental history. Pulling a credit report is also an excellent evaluation tool.
3. Failure to Run Credit Checks – If your tenant is buried under a mountain of debt and is consistently late in making their payments, this should trigger a warning that should, at the very least, trigger further examination. Certain occupations also offer a greater degree of security than others, especially in cases where there are huge fluctuations in the levels of income or a work history comprising frequent job changes.
4. Mishandling of Security Deposit – The handling of the security deposit is a very common source of conflicts between landlords and tenants. Repairs of damages and unpaid rent and utility bills are circumstances where deductions can be made from these funds. However, it is critical that landlords know when those deductions can be made and the proper methods to accomplish them.
5. Failing Standards – All properties must meet local fire and safety codes before a tenant moves in, and must be maintained in that condition throughout the lease. This will frequently require the disbursement of funds for maintenance and repairs. It is a good idea to have an official inspection done by a licensed professional as early as possible.
6. Poor Tenant Relations – Tenants are the primary source of income from rental properties, so learning how to deal with them is a critical skill a landlord must master. Be prepared to handle loss of rental income due to non-payment, emergency repairs due to damages, as well as acts of nature.
7. Inadequate Time Allowance – The sale or purchase of rental properties requires a considerable amount of time and effort. Initially you must expend adequate time in the selection of a property, especially one which can be purchased at a favorable price. Then all the closing costs and the time consuming paperwork must be factored in as well. Selling a property typically results in similar time requirements in the selection and verification of a qualified buyer.
By addressing these factors early on in the rental income process, many of the pitfalls can be eliminated and your success as a landlord can be enhanced.