Avoid these 6 Rookie mistakes
Ever considered becoming a landlord?
There are plenty of reasons you might. For some, it’s the temptation to scoop up a cheap property before the last of the deals vanish. Or maybe you’re just interested in renting out your old place for another source of income.
Becoming a landlord can be a profitable move, but learning the ropes requires some effort; it’s easy to take a misstep and end up in the red. “It’s not a passive investment, like putting your money in a mutual fund. Below, six slip-ups frequently made by newbie landlords, and strategies that will help you avoid making the same mistakes.
No. 1: Underestimating costs
You’ll most likely account for your insurance, taxes, and if you have one, mortgage. But you might miss expenses such as water, garbage, gardening, and regular repair and upkeep tasks. Even riskier, you may fail to put aside a large enough pot for unexpected expenses and big-ticket items. “Mom-and-pop investors tend to skimp on reserve and emergency funds.
For a realistic estimate, plan for annual costs (not including your mortgage) to run at least 35% to 45% of your yearly rental income. When calculating future income, it’s a good rule of thumb to include only 10 or 11 months of payments per year. After all, whenever a tenant moves out, you’ll still be stuck with expenses.
No. 2: Breaking the law
Tenant and landlord laws vary from state to state and even city to city. For example, in some areas, you can require a month-to-month tenant to move out within 15 days, while in others you must give him 60 days’ notice. One easy way to avoid getting into legal hot water: Never buy generic lease or other tenant forms, which don’t account for local laws, from a general real estate site or a big-box store, says Cain. You may want to consider a Property manager (Licensed Agent) that is up to speed on rules, regulations and standard lease agreements.
No. 3: Skimping on vetting prospective tenants
When you’re looking for a good renter, it’s not enough to trust your instincts, or even to go on a referral from a friend. “Landlords get in trouble when they are in a hurry to find tenants and when they feel sorry for someone. Remember, this has to be treated like a business not some charity.
Never rent your property without checking the prospective tenant’s credit, confirming the source and amount of income, and checking in with the current and previous landlords. Look for income to run at least 2½ times annual rent.
No. 4: Ignoring renters insurance policies
Landlord policies cover the structure of the home, your appliances, and liability in case of injuries or property damage. So make it mandatory that your tenant obtain renters insurance for all personal property and make that part of your contract.
No. 5: Failing to check out the property regularly
Don’t count on your renter to tell you about problems. “A tenant will complain about an inconvenience, such as plumbing issues, but not necessarily something like broken rain gutters that can produce major problems down the road. So be pro-active and have property inspected monthly to avoid unwanted expenses or surprises. This is something you want in your lease agreement as well.
No. 6: Tax time
The tax treatment of rental properties is nothing like that of your home, and keeping it all straight is nearly impossible for novice landlords. The rules of depreciation are a prime example. The IRS requires that you take a deduction for wear and tear on the property each year. However, “the rules say depreciation is ‘allowed’ or ‘allowable,’ so people assume it’s optional. Be sure to have a CPA that understands Real Estate.