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Why Landlords Fail: 10 Fatal Mistakes (And How to Avoid Them) – By: Cynthia Hale, Esq

Posted on 01. Jan, 2015 by in all, Magazine Articles

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I recently bought a little apartment complex up on Capital Hill.  While shopping for the right units to buy, I had the opportunity to walk through a good number of units in the SaltLake valley.  So as an investor, I got a recent first-hand look at some fatal landlord mistakes that may be costing you money. Likewise, in my law practice I often see landlord mistakes, many of which can be fatal to your investment health, and all of which are easily avoidable.  This article is offered as a little refresher (you already know everything I’m going to tell you) to help you avoid these mistakes and bank a profit. 

Fatal Mistake #1:  Failure to Maintain And Upgrade Your Property

Maxim:  The value of your property is determined by the income stream that it produces.   

Some investors make the mistake of not putting any money back into their properties.  The business philosophy of some of the landlords whose properties I recently inspected, must be to charge low rents so the landlord can justify doing the irreducible minimum.  This is bad investment logic and often lands you with creepy tenants, government agencies looking over your shoulder, and attorney bills.

If you can spend, for example, $5,000.00 on upgrading a unit and then raise the rent by $100.00 per month, you will have enlarged the income stream of the property by $1,200.00 per year.  Using a “10-Cap,” you will have increased the value of your property by around $12,000.00.  I know a couple of local investors who have recently raised rents by as much as $305.00 per unit, by doing exactly this.  If your property is in a good rental area so that you’re not over-improving, then why would you run down the value of your asset by letting it go to the dogs?

Much can be done with plain old soap and water and elbow grease.  As the units turn over, wash and caulk the windows, re-stain the doors, acid-wash and caulk the tub and sinks, sweep the sidewalks, pull the weeds, etc.  These things cost pennies but the improvements can be dramatic, plus the sweat-equity you’ll build and the improved clientele will be well worth the effort. 

Fatal Mistake #2:  Failure to Treat Your Investment Property as a Business

Maxim:  You’re either making a profit, or you’re running a charity. 

If you have a tenant who is considerably behind in rent, you have forgotten this principle.  Most investors don’t buy income property to become do-gooders or change the world.  It’s a safe guess that you bought your income property to build wealth by generating an income stream, tax benefits, and the opportunity to increase the value of the property through improvements and appreciation.

Make it a policy to always choose your own charities.  Don’t let non-paying tenants nominate themselves as your favorite charity.  It’s business.  I’ve seen several income property owners driven to near bankruptcy for failing to manage their property as a business.  Do not make this fatal mistake.  

Fatal Mistake #3:  Failure to Wear Your Hat as a Landlord

Maxim:  Either you run the property, or the property runs you.

You are not your tenant’s mother, father, best friend, Bishop, Pastor, Rabbi or Social Worker.  You are a mere landlord – with a mortgage to pay.  Establish a business relationship with your tenants on Day #1.  Your tenants are your customers, and you serve them by providing nice units, good maintenance and service with a smile.

If your tenant asks for several extra weeks to pay the rent, he’s asking for a loan.  The tenant is asking you to be his lender.  My personal policy is that I don’t make loans to my tenants.  I don’t mix the hats of landlord and lender.  You need to set your own policy in this area, make it known, and follow it.                                                                                   

If you forget your hat or get confused about which hat you’re wearing, you will soon find yourself listening to hard luck stories, getting entangled in the tenant’s personal life, and then being made to feel like a horrible rotten so-and-so for demanding the rent in the face of the tenant’s woes. 

Get over it.  Demand the rent.  Collect the rent or replace the tenant.  Clean the unit, raise the rent and move on.  And do it before you’ve suffered a fatal blow to the pocketbook.                                                                                                                                   

Fatal Mistake #4:  Failure to Demand Rent

If someone had hold of your ATM card and was withdrawing money daily from your bank account, you probably wouldn’t listen to sad stories and negotiate endlessly to get it back.

Why then, if someone has hold of your rental property and fails or refuses to pay the rent, would you listen to sad stories and negotiate endlessly to get your property back?  Do not make this fatal mistake. 

Fatal Mistake #5:  Failure to Act Promptly

Whether it is a backed up toilet, an electrical problem, a loud party, a non-paying tenant, the presence of unauthorized sub-tenants, drugs, or any other undesirable condition, it is a fatal mistake to neglect to confront the situation and promptly act to remedy it.     

If the problem is your responsibility, you want to act promptly to both protect your property and to fulfill your duty to provide the essential services.  It’s a good idea to get familiar with the Fit Premises Act and your local fit premises ordinances, which often compel you to act within a very narrow window of time when essential services that affect health and safety are interrupted.

If the problem is the tenant’s responsibility, you want to confront the matter quickly to get it handled fast.                                                                

Fatal Mistake #6:  Failure to Get Good Tenants

To get good tenants in good times, you ordinarily need to own decent, safe and affordable rental units in areas where good people want to live.  In the current market however, you’re probably going to have to do more than that to minimize your vacancy rate and seriously compete.

A combination of the availability of low mortgage interest rates plus an increase of new homes being built has resulted in an increased demand for first time home buyers.

Now is the time for all good landlords to go the extra mile to attract good tenants.  “New” is a big seller (as in new carpet, or new blinds, or new paint).  “Clean” is also a big seller.

Whatever it is you do, you need to distinguish your units from the crowd and make them desirable.  There are an awful lot of dirty, dingy units to be had out there, and good tenants will likely be turning their noses up at dirty and dingy when so many units are available.  These concepts are important to minimize your vacancy rates. 

Fatal Mistake #7:  Failure to Thoroughly Pre-Screen Prospective Tenants     

Vacancies and turnover is often an income property owner’s largest expense. 

In some markets, you might have to swallow hard and take a few risks with prospective tenants that you didn’t have to take in better times.  But there’s no excuse for failing to check out the rental history and credentials of prospective tenants so that you can honestly assess that risk.

Sooner or later you are going to draw the short straw and get a bad tenant, no matter how scrupulous you are about checking with former landlords, employers, and other references before renting your units.  But turnover is one cost of doing business that you can keep to a minimum by your due diligence in pre-screening your applicants.  

Fatal Mistake #8:  Failure to Be

Cheerful and Upbeat About Your Property

Good tenants are looking for a good home, where they can feel “at home.”  They want to know that the unit will be nice to live in, that their lifestyle will be compatible with other tenants in the community, and that the schools, transportation, shopping, churches, and jobs suit their needs. 

My family once had a property manager who was a sourpuss.  One day a prospective tenant was leaving the property after being under-impressed by the manager’s presentation of the unit, when the maintenance man happened to smile at her.  The prospective tenant took the opportunity to ask him how he liked the property.  He cheerfully replied that he loved living and working there because it was private and quiet and the neighbors and owners were nice people.  The prospective tenant walked back into the office and rented the unit.

Make sure you train your employees and staff to smile and be friendly and help tenants and prospective tenants in a way that will reflect positively on your property and make them feel “at home.”                                                                                                                         

Fatal Mistake #9:  Failure to Streamline Your Expenses

Ask for cash discounts.  Unless you’ve budgeted for a major renovation, try not to replace when you can refurbish, cover, resurface or repair.  Use the skill, knowledge and efficiency of the Apartment Association vendors whenever possible. 

For example, the cost savings of repairing and resurfacing a tub and/or shower wall in place (rather than replacing it) is huge.  Also sinks and counter tops can be refinished for less than half the cost of new.  Over the years I have used Apartment Association vendors for those repairs, as well as beautiful carpet and linoleum remnants for a fraction of new retail prices, for carpet cleaning, roofing, appliances, parking lot resurfacing, and much more.  Replacing all screens with new screen material and a do-it-yourself rolling tool from Home Depot is cheap and easy and makes the property look well kept.  Other efficient vendors and tricks of the trade abound.

As income property investors we’re willing to put up with a lot of grief in order to make a profit.  Reduce the grief and increase the profit by streamlining your expenses.  

Fatal Mistake #10:  Failure to Refinance High Interest Investment Loans

Reducing your interest rate by even 1% could save you thousands.  Current rates on investment properties are at 50 year lows.  Don’t miss this market opportunity to reduce the cost of your debt service.

I hope this little refresher will help you to avoid these 10 simple but fatal mistakes that might otherwise prevent you from realizing the fun of income property ownership and a nice return on your investment.  Now, go forth and make a profit! 

Serial entrepreneur Cynthia Hale, is a “retired” real estate attorney licensed in Utah. Cynthia is also a third generation real estate investor, and currently co-owns and self-manages 100 houses and apartment units with her son and daughter-in-law.  Visit Cynthia’s blog at www.MotherofAllLandlords.com

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