Today I want to share with you some of the things that I’ve learned and observed over the last 13 years of managing our own rental properties, as well as working with investors and landlords with our team, from all over the country, as well as all over the world; people that are buying investment properties and use Keyenter to manage those and to help them navigate the world of owning rentals and growing in wealth through real estate
I want to share some insight on these top three ways that Landlords fail. Now, as I’ve been looking at this for years, we see a lot of different mistakes that landlords often make.
Number one: not understanding or not following local laws and regulations.
Oftentimes, especially for those self-managing their rentals, we don’t either have the time or we don’t care enough to find them. There are many regulations such as the fit premises act, or fair housing laws, or different state statutes that are in place to protect residents and that you need to live by and work according to.
You need to consider that in a lot of different markets and different cities and counties and States and everywhere, there are a lot of different things that are put in place to protect people, to protect tenants.
Furthermore, there are different agencies that are set up. Agencies and different groups are actually put in place to try to catch you. In terms of fair housing, there are actually fair housing centers that are calling landlords and calling property management companies to pretend they’re prospective tenants to try to see if you’re going to violate some of those laws.
There are also IRS issues. So many things to be aware of that oftentimes landlords just don’t have the bandwidth to really understand, or maybe they just don’t care because they don’t see that it is big enough of a target. The problem is that when you’re in violation of those laws and regulations the penalties can be pretty severe.
Number two: poor planning and budgeting.
This can be a killer for a lot of people that are buying rentals. They’ve got enough cash flow, but they don’t plan on there being maintenance and repairs, deferred maintenance, and these sort of things so they get into financial trouble. I have an experience with one investor who got frustrated that the furnace went out at their rental property and they had to replace the furnace because they were having to pull money from their own personal reserves that he was planning on taking his family to Disneyland with. And he got upset with our staff saying, “Oh my goodness, you know, how am I going to bring this to my wife?”
And I’m just thinking here why we do not have a reserve set aside for this property to cover some of these things that people think are unexpected?, but truly we need to expect the unexpected in this world of owning a rental.
Our recommendation is to have three to four months of rental income. So if you rent out your property for a thousand dollars, have $3,000-$4,000 in a separate bank account in reserve, and then, on an ongoing basis, budgeting roughly 10%. It could be a little bit less if the extra maintenance is covered by an HOA or maybe a little bit more if a property is older, but of that, of gross wrens.
So again, a thousand dollars rent about a hundred dollars a month, budgeting that for ongoing maintenance and capital improvements and those sorts of things over the course of time. Why? Well you might go six months without having to spend any money and then you have the water heater go out, so it’s important to have that in mind as you’re budgeting.
Number three: not running your rental like a business.
This is one of the most common issues that landlords have. They don’t treat it like a business when in reality it actually is a business.
Even if you don’t have it owned by an LLC, which we recommend, but it is a business on your taxes.
This usually flows into your schedule C if you don’t have it running through a separate S-corp but the key thing to keep in mind here is that it’s more of an emotional decision to run it as a business and trying to disconnect emotionally from the property is so critical. This can be very difficult for people, especially if they have lived in their property for say, five, 10, 20, 30 years even and then they converted it into a rental and they realized that if they’re having a tenant in that home, they’re not going to take the same level of care as they once did when they were living there.
It is so important that you’re able to disconnect emotionally and make logical decisions based on reason, numbers, and those sorts of things, just like running a business.
If you’re not able to disconnect emotionally and run it like a business, it’s important to hire someone that can, so that you’re able to focus on the business side of it rather than the drama that sometimes a rental property creates, with the tenant and maintenance and those sorts of things.
Finding a property management partner that you can actually have as the landlord, and the buffer between you and the tenant can be fundamental. A lot of people just aren’t built and made to be landlords and sometimes it can be a challenging thing for people to handle.
This isn’t a commercial for us, but we’re happy to talk to you about your property, but you can find any property management company if that happens to be what you’re looking for in order to have these three things taken care of for you: understanding the laws and the regulations and the things that are local in your area, being able to have someone that can help you with the budgeting side of your rental and giving you that education and help you actually run it according to a budget and of course running it like a business.