Buying a rental property can, without question, be an excellent way to bring in extra income. Property is one of the best investments to be made in today’s economic climate. But being a landlord is not easy. It’s an occupation that comes with many responsibilities, and it’s easy to make mistakes both in maintaining the property itself and in dealing with your tenants. It’s a business you need to go into with your eyes wide open. So, to make the task a little easier, here’s a list of the top 10 costly mistakes new landlords can make.
1.) No insurance. Of course, you’re going to have insurance on the property itself. But you’re also going to need landlord insurance. You might be the world’s greatest landlord and do everything right. But you can still find yourself in a legal dispute with your tenant. And if you do, you’re going to need insurance.
2.) Not conducting proper background checks and tenant screenings. You need to know who’s going to be living in your property. You need to know that person can and will pay their rent on time, and that they will take care of your property. That means doing a proper screening, complete with references from current employers, credit checks, online searches and face-to-face meetings. It may sound invasive, but you’re entrusting your property to this person, so know who they are.
3.) Using a verbal lease agreement. Always, always, always make sure the lease is in writing. Not only does a properly written lease ensure that the tenant knows exactly what is expected of them, it ensures that, should there be any disagreement at some point, it doesn’t come down to your word against theirs. A signed lease is your protection.
4.) Poorly written lease. Again, this is your property you’re entrusting to your tenant. So make sure they sign a lease that outlines exactly what you expect of them, and exactly what steps you can take if they fail to live up to the agreement. The lease should outline not only basics like the names of all tenants, the term and nature of the rental, the amount of rent and when it’s due, but the penalties for not paying on time. It should break down exactly what sort of maintenance and repairs the tenant is responsible for, what activities are not allowed, and when you, as the landlord are allowed to access the property. If you’re unsure about anything, consult a lawyer about the lease.
5.) Not conducting a move-in inspection. Before the tenant moves in, make sure that you go over the property with them in person. Have a checklist with you that contains all the items you want noted: the state of each room, the walls, the floors, the appliances, what needs painting, what might be broken, what’s not working, everything down to the lightbulbs. Make sure your tenant understands that upon their departure, you expect everything to be in the same condition as it is when they move in. If a dispute arises later about the condition of the property, you can produce the checklist. Make sure the tenant signs two copies of the list, one for each of you.
6.) Not requiring tenant insurance. You have your own insurance as a landlord, but you have to ensure that your tenant also has insurance. If your tenant causes damage to the property (maybe a fire, in the worst-case scenario), or if somebody gets hurt on the property during the tenancy, you need to know that you’re not going to be stuck with the bill.
7.) Offering free rent in lieu of repairs. It’s tempting to just place the responsibility for all repairs on the tenant. But such an agreement is too easy to abuse. You can’t be sure the repairs will be done properly or at all. If they’re living rent-free, the tenant may just decide not to make the repairs. And, of course, offering free rent defeats the whole purpose of buying a rental property in the first place.
8.) Not collecting first/last month’s rent via certified cheque or bank draft. First and last month’s rent are the only payments you’re guaranteed to receive, so you need to get the tenancy off on the right financial foot, That can mean a certified cheque or bank draft for first and last month’s rent. Ordinary cheques can take days to clear, and, of course, they can bounce. With certified cheque or bank draft, you’re sure the money is there. You may also choose to accept money via e-mail transfer, especially as many younger tenants may not even have chequing accounts, which has the same advantages.
9.) Allowing the tenant to renovate/alter the property. This is your property, the tenant is only renting it from you. They have no right to make renovations or alterations without your permission. And, unless you have reason to thoroughly trust them, you should not give that permission. Not only is there the potential to damage your property, but if somebody gets hurt in the process, it could lead to legal trouble. If a tenant proposes an alteration that you like, and is willing to pay for it, make sure that you select a professional to do the work.
10.) Not using a property management company.
The easiest way to avoid the previous nine mistakes is to let a property management company do all the work for you. A good company has years of experience in dealing with everything listed above. They can take on all the headaches, make sure you have good tenants and a well-maintained property, and ensure that you have a steady income coming in from that property. If your sole interest is in making money from your property, why not leave it all to a reputable and competent property management company. Buying a rental property is still a wonderful and highly profitable investment. But you need to know what you’re getting into beforehand. There are plenty of other mistakes that you can make, and a lot more research you should do before you become a landlord. But if you can avoid the mistakes listed here, you’ll be well on your way to fulfilling your ambition – and your bank account.