The real estate market often attracts non-business people more than other business fields. There are many reasons for this, some of which are the promise of residual passive income, building equity, and a “simple” business model that can be understood. But for all the great reasons to jump into real estate, there are always newbie landlords that end up failing, in debt, or bankrupt.
Although every situation is unique, here are the top 5 reasons why new landlords lose in the real estate game. Missing even one of these will make a new real estate venture turn south.
You might be a losing landlord if you’re:
1. Not addressing small problems quickly.
When little things come up, a successful landlord will take care of them immediately. The unsuccessful one waits until they become big problems (and big expenses). That tiny leak in the roof you ignored could become a $5,000 mold repair job. Planning for expenses before they happen takes the surprise and pain out of repairs, and getting little things done on time makes the big things happen less frequently.
2. Not putting a dollar value on your time.
Tracking every nickel spent is good. But when you start unplugging toilets yourself on a Saturday afternoon instead of being with your family, you stop owning your business and your business starts owning you. Outsourcing that work to a property management company might seem expensive, but consider it an investment that buys you time and freedom.
Successful landlords stay enthusiastic about their business because they aren’t dragged down by daily trivialities. In the long run, being happy about what you’re doing results in winning at it.
3. Having a bad relationship with tenants.
This doesn’t mean you have to be best friends with tenants. But landlords that have been too lenient often end up struggling. Do you let late rent payments slide unpunished? Are your tenants respectful, or do they feel entitled? Problems with tenants are a major headache for landlords. If you didn’t screen properly before renting out, watch out for this one.
It might be worth giving good tenants (good credit history, steady employment) a discount to attract them (be careful that you don’t violate fair housing and equal opportunity laws) . You might see less cash flow every month, but it’s better than having a high rent that doesn’t get paid on time (or at all) by bad tenants. Consistent cash flow is better than “more” cash flow that fluctuates a lot.
Troublesome tenants have been known to cause landlords to stress and worry, keeping them up at night and their morale low. Don’t do that to yourself. Screen, interview, and make sure you’re selling your product to a worthy customer.
4. Not treating it as a business.
Your property is not a charity to the community. It’s a business. If you run it any other way, you’re business fails. Many landlords skip having a business plan, evaluating for growth opportunities, and pricing their product accurately (overcharging or undercharging rents). If you haven’t looked at the business side of your property, you’re leaving it to chance.
This also relates to your relationship with tenants. If tenants see you as a business person that only looks at numbers and isn’t afraid to replace bad tenants, they’ll know you aren’t afraid to evict. If they see you as a soccer mom, they’ll treat you like one.
5. Not understanding financial management of property.
This one is related to the previous, but it’s so important it deserves it’s own point. The biggest threat to a landlord is not having an objective view of a property’s finances. Too many landlords have unrealistic expectations about cash flow. It might look good on paper, but in reality tenants do not always pay on time or in full.
Real world operating expenses are also huge. Many newbies fail to consider all the expenses they’ll have and end up losing money. Your positive cash flow must cover operating expenses and your long-term costs, like improvements, upkeep, and repairs.
Not finding a solid accountant or understanding pre and post tax cash flow make your business rely on luck more than logic. A good understanding of depreciation, expenses, equity, risk, and reserves is also something every business needs.
At the very least, plan an exit strategy. Don’t get stuck in a bad situation.
These 5 points aren’t everything needed for a successful real estate venture. But leaving any of these out will result in a failing rental property. If you’re serious about making money and building equity through real estate, make sure you can check all these off your list.