We're anxiously awaiting the arrival of Hurricane Matthew here in Charleston. Rachel and I were initially going to go to Greenville, but we decided to stay because she is in the busiest weeks of the year at her job and I'm too anxious to leave my properties in the face of an impending storm. Fortunately, we're in almost in Dorchester County and I don't expect to have a problem with our personal property. My other properties are all older and have made it through countless tropical storms and hurricanes, but it's nerve-wracking nonetheless. While we still have power, I figured I should make good use of my time and write a new blog post. Wish us luck as we wait out this storm. I hope there won't bee too much damage in the wake of Matthew.
Today's post is inspired by a blog post on BiggerPockets. It is a list and explanation of 8 blunders of newer landlords titled, "The Top 8 Mistakes Made by Rookie Landlords" by Kevin Perk. I was motivated to write this because I have made many of these mistakes myself, but I've also been helping a lot of new investors look for rental properties recently. Most of the folks have never been a landlord, so a precautionary list of avoidable mistakes would be a very kind addition to them as it would have been to me in the beginning.
1. Screen your tenants
I do screen my tenants and I always have. The extent of which varies and I will be screening my tenants more strongly in the future. My rentals are in C neighborhoods, so it is expected that some of the financials will bot be squeaky clean. I always check paystubs and verify employment. I don't take credit too seriously unless the prospective tenant claims to have impeccable credit. That's red flag for me. I find most people will tell you that they have bad credit in C or D neighborhoods. If they claim otherwise, they may be trying to hide their poor credit. Remember that you CAN NOT and SHOULD NOT discriminate prospective tenants. The only criteria that I use to deny tenants is their financials, background checks and references. I would absolutely recommend that you screen your tenants using a paid service. Many background check sites will only charge $10 or $20 for a check. There are a plethora of sites for landlords to screen their tenants and they publish and easy to read report. There is really no telling what the outcome could be if you choose a bad tenant.
2. Not treating your properties as a business
I see this happen all the time. Someone owns a rental property and they treat is a hobby. It is not a hobby. It is a business. The liability and tax implications prove that. I analyze properties for myself and my clients who's owners have not treated their property as though it is a business. They do not have an entity set up (which isn't necessarily a bad thing), they do not have separate accounts, they do not have a trust account, they do not keep income and expenses logged, etc. It is frustrating. It is also terribly counter-intuitive as a business owner not to track your funds. You will have a much harder time growing your portfolio without treating your properties as businesses.
3. Buying the sob stories
As a landlord, you will undoubtedly hear excuses and heartbreaking tales from your tenants. I do not condone being a heartless, slum lord. However, you need to be very selective in granting extensions, grace periods and exceptions. Once you've done it once, it will likely not be the last time. I do not objectively deny any and all requests for help from my tenants, but I need to see proof to confirm that the hardship is real.
4. Not getting all agreements in writing
A lot of landlords fail to document their agreements with their tenants in the leases or elsewhere. Often, things will change and requests will be made. If both parties agree to any terms at all worth noting, they should be written in the lease or an accompanying document and signed by all parties. You would be surprised how many agreements are made and then suddenly forgotten when the time comes to make good. I have also begun texting my tenants more often when discussing important matters to have documentation of the conversation (and for convenience).
5. Not knowing what things cost
Landlords learn quickly that shit happens. When said shit happens, repairs must be made. Those repairs are not cheap. Many new landlords do not know the costs associated with most mundane maintenance and repairs that must be made very often around rentals. Sadly, when you don't know the costs, you can't be proactive and prepare for your repairs. If your tenants tells you that the toilet is acting up, you should go ahead and assume that you will likely need to replace or repair it soon. If you hire those kinds of jobs out, it will be far more expensive that you would likely assume. I self-manage my properties at the moment so that I can go and make those kinds of repairs with very little material cost. Start to familiarize yourself with the cost of material and labor for household repairs and maintenance so that you can be better prepared for them when they arise.
6. Not knowing the laws
Sadly, many new investors being investing in real estate thinking it's as simple as handing over the keys and collecting the checks. It is not so simple. There are mounds and mounds of laws, rules and regulations regarding tenant/landlord agreements and relationships. These are Federal, State and local. They vary from non-discrimination to accessing the property to leases to liability to livability. They can be staggering if you're new. Make absolutely certain that you familiarize yourself with the legal requirements of a landlord on all fronts. Keep in mind here that these laws are meant to protect everyone in the agreements and tenants deserve safe, fair and affordable housing.
7. Not inspecting the property
A lot of landlords assume that everything at the house must be going great because they haven't heard otherwise from their tenant is weeks. While this can be true, it may also be quite the opposite. Anything can happen in there. And if there is damage, most tenants are afraid to tell their landlord about it. You should absolutely make it known to your tenants that you would like to do a mandatory inspection every X amount of time. Just to make sure that everything is ok and there is no inordinate damage. You can not just drop in your tenants. You must give proper notice in order to visit your rental property. Doing and thing or two around the house or knocking on the door to ask a questions is ok, but marginal. You should always notify your tenants that you will be visiting. What I usually do is just check in with them every 30 days or so. I ask if there is anything they need. More often that not, they will mention something that doesn't seem right and that is my opportunity to check it out and inspect the property.
8. Renting to friends and family
This is a tough one. A lot of new investors think it sound great to rent to a friend or family. They think their friend or family will be a great tenant. They may even have all of the history to prove it. However, if something were to go wrong in that friend/family member's professional or personal life and they became a nightmare tenant, it is infinitely harder to handle those issues when you are close to them. It is not necessarily true that renting to a friend or family member will 100% turn into trouble. It is true, however, that it is much harder to be amicable and professional when you are close to them.
I hope that these warning help any new or aspiring real estate investors out there. Don't get me wrong, investing in real estate is an awesomely powerful and rewarding thing. But, it is a business. There are a lot more precaution, investigation and education involved than I believe many folks realize. As always, let me know if you or anyone you know if interested in buying or selling residential, commercial or investment real estate in Charleston, SC.
Wish us luck as we brave hurricane Matthew!