This article was originally posted by Investor Real Estate Services here in Chattanooga. You can check out their website by clicking here.
You can learn from other people’s mistakes, so I would like to share mistakes that I have either personally made or have watched investor-clients make.
1. Being too quick to fill a vacancy
I often see new investors fall prey to this one. I, too, many years ago made these bad judgment calls (never again). It is easy to drop your standards when a unit is about to become vacant. Emotions take over and a prospect comes to you waving cash at you. Sure, they do not represent the perfect tenants and their income is lower than I require but they are nice people and they have the cash for the deposit and first month’s rent. Besides, I will start negative cash flow next week if I do not rent to them. Three months later, I struggle to collect rent and month after month is a fight to get paid. I tell myself, “I wish I held out for better tenants.” Like so many others, I have learned it is far better to have a few weeks of vacancy while finding the best tenant than to hurry and rent to a bad apple.
2. Treating tenants as an income source instead of valued customers
Having an investment property business is no different than any other business. We need to work hard to obtain customers and treat them well so they will return. I was a landlord at the age of 18 and to me then, tenants were my income source. I since learned this valuable lesson that indeed they are an integral part of the business and need to be treated as valued customers. I do continue to see investors treat tenants as an income source instead of a valued customer. Tenants needs to be nurtured so they feel like valued customers and are willing to return at time of lease renewal.
3. Failing to clearly define rules and boundaries
The big question is, “Who is setting the boundaries?”
My experience tells me that when you give them a chance, many tenants will immediately push the boundaries to see what they can get away with. So either you are setting precedents to the rules, or they are.
I create a list of expectations that is given to them at move-in when you do the walk through inspection. This list should outline the parts from the lease on policy and procedures which includes what they do as a tenant and what you do as a landlord.
4. Trying to become friends with their tenants
I do see a lot of landlords try to be friends with their tenants. You want to like and trust each other but you are in a business relationship and it should stay that way. Developing a close relationship makes it difficult to manage from a logical business person’s perspective. Emotional-based decisions have very little place in running an effective business.
5. Failing to keep property maintained
Looking at hundreds of properties each year, I continue to see a large number in disrepair. When talking with sellers the common theme is they want to increase cash flow and do so by ignoring repairs or simply doing inexpensive “bandages” on a property. In reality it creates unhappy tenants who move frequently, which actually results in lower cash flow. The repairs themselves that get ignored devalue the property. My experience tells me that to maintain maximum cash flow you want to maintain a property in great condition.
6. Missing opportunities on multiple-year leases
As investors, you all know that tenant turnover is the single largest expense we encounter. You do not have to continue to carry that burden. This is an expense you want to address and fix not just accept it. I have found great success in offering two- and three-year leases. It immediately goes to identify tenants who want to stay long-term. I have even used escalators to increase rental rates each year. Both ways your cash flow will be more consistent and your tenants who desire to stay will know what the future has in store for them as opposed to wondering what is going to happen on their move-in anniversary. You also want to treat these tenants well so they continue to renew leases.
7. Being a landlord instead of being an investor
This one may be subjective but it comes from my experiences working with hundreds of investors. I find a common denominator separates the most successful investors from the ones who struggle to advance. The most successful investors spend their time investing instead of being landlords. As a licensed real estate broker, I am always asked if I will manage my client’s property. I always state that managing property is a full-time position. To be effective at it, you need to devote full-time attention to it. Perhaps one of the biggest mistakes is trying to be effective as a part-time landlord.
“To achieve your dreams you must embrace adversity and make failure a regular part of your life. If you’re not failing, you’re probably not really moving forward.” This is my favorite quote from the book, “Failing Forward: Turning Mistakes into Stepping Stones for Success” by John Maxwell.