Unfortunately, most new landlords fail within the first eighteen months, usually from a series of common mistakes that are easy to avoid. Being a landlord does require some hard work, which most new landlords fail to invest, and it requires a strong cash reserve for unexpected expenses.
Most often, becoming a landlord is something that people do in addition to a full time job, which means they generally don’t have a lot of time to spend on holding open houses, showing rental properties, sifting through rental application after rental application, doing employment verifications, responding to maintenance and repair issues, etc. It’s work, and it’s an investment that’s required to avoid having to evict a bad tenant later on, which is extremely expensive. Far too often, new landlords simply take the first rental application that comes along, and assume they’ll pay their rent on time each month, not trash the rental property, and generally be conscientious and responsible.
For this reason, it’s highly recommended that new landlords hire an experienced and professional property management company to screen tenants, field phone calls at 3 AM about flooded basements, handle evictions, go to rent court, etc. It typically costs 7-10% of gross rent collected, and it’s worth every penny, particularly for landlords who have their own full time jobs that occupy their time.
An even more common problem that plagues inexperienced landlords is undercapitalization. New landlords simply assume that rent money will come in every month, and anything over and above their mortgage payment is reliable income. This is not the case, as unexpected expenses WILL arise, and more often than new landlords predict.
To illustrate just how important it is to maintain a strong cash reserve as a landlord, here’s a common problem that landlords experience all the time: A tenant pays their $1,000 rent on time for the first few months, then suddenly stop paying. After a month or two of excuses from the tenant, the landlord realizes they have to file for eviction, so they give the tenant the required notice in their state, which gives the tenant even more time to bring their rent current. When the tenant STILL hasn’t paid, the landlord files for eviction, which has to go through the long and tedious eviction court process, have a hearing, schedule an eviction date, etc. By the time of the actual eviction, the landlord has lost $4,000 in unpaid rent and $500 in eviction costs.
Well, the tenant didn’t like being evicted very much, so they left the property in bad shape. After a month and another $1,500 in clean-out and repairs, the rental property is ready to be shown to new tenants. So the landlord spends $300 on advertising, and starts accepting rental application forms, in hopes of signing a new rental agreement as quickly as possible. After a few weeks of advertising and showing the rental property, and another week or so in reviewing rental application and doing background checks, the landlord signs a new rental agreement, and finally start collecting rent again. By now, they’ve lost six months worth of rent, paid the mortgage, taxes, insurance, and utilities for those six months, paid for eviction fees and clean-out and advertising, and have lost $8,800 in the process.
Landlords need cash available to weather these storms, if they are to survive. Aside from keeping cash on hand, landlords are well advised to borrow only a minimal mortgage, if any at all, in order to maximize cash flow and keep a cash reserve available. A good rule of thumb when calculating your projected rental cash flow is to only use 75% of your rental agreement amount, to allow 25% for unexpected expenses, and then subtracting your predictable monthly expenses (mortgage, real estate taxes, rental insurance, entity maintenance, etc) from that.
For landlords willing to invest the time, and able to keep enough money in reserve for unexpected expenses, the rewards include strong monthly cash flow and an appreciating asset. Landlords are immune to fluctuations in the real estate market, as they can simply sign a rental agreement and wait for the perfect time to sell. It’s a great business, if you have the discipline to succeed in it, and it can eventually free you from the grind of 9-5 if you achieve a high enough cash flow.
Kevin Kiene manages a website for landlords that offers customizable, state-specific rental agreement forms, along with eviction notices and a free rental application form.
[tags]rental agreement, rental application, lease, eviction, landlord, forms, form, free, rental, invest[/tags]
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