How To Avoid Six Common Rental Property Pitfalls
When you take the step of owning your first rental property and becoming a landlord, you’ll likely underestimate just how many things can eat up your time and energy.
On the tenant side, you can find yourself doing everything from mediating neighbor disputes to following up on late rent payments. Then there’s the property management — fixing leaky sinks, servicing major appliances and landscaping. Finally, there’s the financial side of figuring out how to best do your taxes, how much to deduct and what can or can’t be counted as an expense.
As a landlord, you won’t be able to avoid every issue, but there are a few pitfalls you should avoid at all reasonable costs. I’m not talking about pitfalls that can result in minor nuisances. I mean the areas that, if gone unnoticed, can result in more significant losses in the form of your time and money.
1. Skipping Tenant Background Checks
Don’t base your decision whether or not to rent an apartment to someone solely on your impression of them when you’re showing the apartment, or whether the person can come up with the initial funds for the rental. Take the time to call at least two prior landlords, and pay for a credit and background check. In an hour or less, you’ll be removing a lot of potential risk.
2. Collecting Rent By Check
If you want consistent cash flow from your rental properties, the best thing you can do is automate your tenants’ rent payments. The days of one-off payments are numbered. Think about it: Do you still pay your cell phone bill or car loan with a check?
By automating, you’ll avoid any issues with well-intentioned tenants simply forgetting to put their rent check in the mail on time. If one of your tenants is having financial issues and misses their rent, you will know the moment their bank fails to send the automated payment, and will be able to follow up accordingly. And, you’ll collect rent on the day it’s due, not up to 30 days later.
3. Mismanaging Security Deposits
Many banks and merchant service providers have great solutions for landlords to help set up automated rent collection. While you’re setting this up, you can also look into systems that automate security deposit management. The compliance laws connected to security deposits are built to protect tenants, not property owners. This will save you a lot of headaches in paying interest on tenants’ deposits every year, bookkeeping and returning deposits to tenants when they move out. It’ll also make claims against the deposits easier to make and defend.
4. Going Off-Lease
As a landlord, stable tenants are your greatest asset. That said, just because you have a tenant who pays the rent on time, gets along well with neighbors and even does some maintenance themselves doesn’t mean you should be lax when it comes to renewing their lease.
Some landlords fear that making a tenant sign a new lease every year, and even issuing a rent increase, could make them rethink whether they want to stay in the unit. While this might be true to some degree, the alternative is far less favorable for you as a landlord.
While tenant law differs by state, generally, when a tenant goes off-lease they only have to give you 30 days’ notice before they leave. This could mean longer vacancies for you, especially if a tenant leaves during a time of year when people in your area don’t move as much. Also, you’re likely missing out on an opportunity to increase rent, which means your investment is underperforming.
5. Letting Your Basement Freeze
I talked a bit about proactive maintenance before, but here I’d like to focus on one area of particular importance: your basement’s temperature.
In cities like Boston, where you have a combination of cold winters and old homes with large, drafty basements, your basement can be a big liability. Even if you have a furnace in the basement, during spans of days or weeks where you consistently have below-freezing temperatures, you can find yourself in a situation where the basement freezes. Particularly if you’re managing multiple properties, you might not realize that there’s an issue until your tenants call you in the middle of the night to say there’s no running water.
Repairing burst and frozen pipes, not to mention the resulting water damage, can cost tens of thousands of dollars and countless hours of your precious time.
Given the number of inexpensive solutions there are to making sure your basement stays at a reasonable temperature, there’s no excuse to let it dip below freezing. For instance, in one of my units, I bought and installed a simple thermostat-enabled plug and connected it to a couple of space heaters. If the basement temperature dips below 40 degrees, the thermometer triggers the space heaters. A quick web search will show you many systems like this one for less than $100.
6. Not Hiring An Accountant
Unless your day job is accounting — and even if it is — don’t take on the finances of your rental property yourself. Accountants who know real estate go a long way toward making sure you’re complying with city, state and federal real estate tax laws, and making sure you deduct every penny you can. The time and money you’ll save by hiring an accountant will be more than worth the amount of money you pay them.