The most common mistakes newer landlords make and how to avoid them.
Becoming a first time landlord can be stressful, especially if you’re taking on the responsibility of managing the tenant and property yourself. But with the right advice and the right team around you, you can look forward to a relatively stress free and financially rewarding tenancy.
Here are some of the most common mistakes newer landlords make and how to avoid them.
Neglecting to treat property investments as a business
This is the main mistake new landlords make. If you were to go out and buy a half a million dollar business, you’d treat it seriously, wouldn’t you? But too many people buy investment properties and treat them as a hobby, failing to achieve maximum return on their investment. It’s crucial that you have a business plan and strategies firmly in place and a good team of professional around you.
Becoming too familiar with the tenant
The relationship between a landlord and tenant is very important and when it goes wrong, it can be very costly. While some aspects can be rewarding, it can make it difficult when you need to make the right business decisions. What’s more familiarity does breed contempt. For example a tenant may be late at paying the rent if they know you and think you won’t mind. Or it could be difficult when it comes time for you to raise the rent at the end of the lease agreement. This is why most financial experts recommend using a Property Manager instead of managing the property yourself.
Considering the property your home
Avoid considering the investment property your own home. Don’t try to imagine living there yourself. Think about the decorating, for example. New landlords sometimes go to town painting or decorating the home once they’ve bought it. While you might love a purple feature wall, or a bright yellow carpet, you’re not the one that has to live with it. Keep colours neutral and do something that will appeal to the majority of tenants.
Failing to keep the property in top condition or quickly doing repairs
A simple coat of paint, removing a wall or even bigger renovations can make a huge difference in the value of the property. What’s more, your rental yield can be increased greatly with improvements and repairs that allow you to charge a higher rent. Don’t skimp when it comes to looking after the property or you’ll land up losing out on rent. Conduct repairs quickly and use professionals if you’re able to.
Lack of a Depreciation Schedule
A depreciation schedule is a list of items that can depreciate at a particular rate which means you can claim a tax deduction against your income. This is so useful for new properties. Here’s the reality: an investment of just a few hundred dollars can save you heaps of cash in tax, even on older properties.
Failing to increase rent or increasing it too much
As a landlord, you should be reviewing the rent on your investment property as often as possible and deciding if you want to increase the rent or leave it at the current rate. Negotiating a rent increase with a tenant can be an uncomfortable discussion to have, so many landlords simply avoid it. This can create an issue a couple of years into the tenancy where the property falls significantly below the market rate and you either accept the loss or have to increase the rent significantly. Regular reviews are better than infrequent reviews that force you to hike the rent up drastically, increasing the chances of tenant moving out.
Not focusing on the bigger picture
If you’re serious about property investment and want to create a bright financial future, stay focused on building your portfolio. To do this you need to leverage the equity you currently have in your portfolio. The higher the rental returns and equity, the more you’ll be able to borrow.
To establish the value of your portfolio the bank will use an independent valuer to value your property. It’s important to understand the value they put on the property and then compare this to what you think. If they substantially under-value the property, follow this up with your bank. Put together a list of comparable sales in the area and go through them with the bank. If your argument is valid they will listen.
Not using a great Accountant that understands the property game
A good accountant is a valuable asset. One who understand property, especially so. Use an accountant who invests in property and be sure they’ll be able to give you the right advice.
Use an experienced Property Manager
This is one of the most important aspects of a successful investor – the ability to delegate and make use of other’s expertise. The same goes for using an experienced Property Manager. They’re not particularly expensive and their services are tax deductible. They’ll make sure there’s always a good tenant in your property and will collect the rent, pay the bills an oversee repairs and maintenance. They’ll also look after the monthly and annual accounts so the accountant can prepare tax returns easily.