The 7 avoidable mistakes investors and landlords should recognize Kevin Guz blogs in his advice for real estate investorsNo. 1: Healthy cash flow is a must

It’s so elementary and the foundation to your success as a landlord, yet it’s a commonly violated principle. A rental property must be set up for success, meaning the financials behind it must cash flow. So many times you see new or even seasoned landlords purchase property with the intent to rent it out, but at the end of the month it’s a break-even or even a loss. That comes from sometimes simply not facing reality that there are going to be vacancies, repairs, property taxes, and insurance, principal and interest payments.

You’ve got to be sure, especially new investors who are enticed by the idea of rental properties, to factor in all those expenses. Because when you don’t, and you find yourself with a break even or a net negative cash flow on an investment property, it will impact every decision you make on that property going forward because you are not making money or losing money. It is almost a snowball effect and that investment can sour very quickly. So make sure your properties have a healthy cash flow.

No. 2: High rent or above-market rent is not the cure-all

Higher rents may be the first place you turn when you have a negative cash flow or break-even property. It sounds great and makes the spreadsheet look great, but there are other problems that come from above-market rent, excessive rent or unrealistic rent. You have increased vacancies. It’s not easy to find somebody willing to pay above-market rent. Tenants are calling every rental in the neighborhood. They know what those homes rent for. When yours is above average market rent, they are going to walk away from yours and go to the next one. When you do get that lucky person, because of that higher rent, they may be much more demanding in terms of maintenance and upkeep. And, your premium rent could get absorbed in increased tenant demands and even perhaps derail the tenant-landlord relationship which ultimately is never a profitable scenario. Don’t try to be a hero with above-market rent because a lot of times it just does not pay off long-term.

No. 3: Do not cut corners on the background check

You got the cash flow property, you have it marketed at market rent, now it’s time to get a tenant. Don’t cut corners on your background checks. You are going to be so tempted. That first family that walks up and meets you for a showing, you are going to want to rent it to them. They are looking to move in in a week. Everything looks great-husband, wife, small child, no pets, no smokers-whatever your key criteria. That doesn’t and should never prevent you from doing a proper background check. It will uncover things not apparent meeting with them in the living room on a Saturday afternoon when everything looks great and sounds great. Don’t cut the corners. Pay the expense of the background check. Take the time and it will definitely pay off in the long run.

No. 4 – Avoid trying to save your way to profitability

Now the tenant is in there and everything looks great. Resist the temptation to cut corners and save your way to profit by not maintaining the property correctly. You have to exercise prudence. You cannot repair things that do not need to be repaired. You will get requests for, “Hey can you pay for this?” Some may be cosmetic or luxury enhancements and they ask, “Can you replace the linoleum with ceramic tile or can you replace the counter tops?” Those are nice things to do, but you’ve got to look at them rationally. You don’t do them unless they are needed to maintain a safe and healthy living environment. You cannot turn your back on legitimate repairs such as leaky roofs, non-operable appliances, plumbing issues, electrical issues, or the basic fundamental components of the property that make it a safe, clean and comfortable place to live. You cannot save your way to additional profit on this property. Maintain your property, take care of it, it’s an asset you have to continue to invest in to allow the asset to work for you. If you neglect the asset. it will ultimately neglect you in terms of returns it generates for you. So take care of your properties. Don’t save your way to glory.

No. 5 – Collect the rent on time

I will admit I am guilty of this and all landlords are guilty of it, whether we choose to admit it or not. You have to be diligent in your collections. We all have a human side. When the first of the month rolls around, and a tenant has hit a hardship and they are not on time with the rent, half the time they have very valid excuses such as a car broke down, a medical issue, loss of a job, loss of hours at work they thought they were going to get. They are all very legitimate reasons most of the time. And with those legitimate reasons, the human side of you will want to help. We all have a servant nature to a degree. You want to give them some leeway but at the same time you have to be diligent in your collections. So many times I have purchased homes from landlords and I ask why they are selling and they will say, “Well they fell behind in their rent, I cut them a break a few months in a row, things snowballed, it’s now not a profitable investment for me. I’ve had to neglect repairs and maintenance, our tenant landlord relationship has been destroyed and I just want to get out of this and sell the property.” At the end of the day, it’s all because they and landlords were not diligent in adhering to the terms of the lease and collecting and holding the tenant accountable, communicating and setting expectations and then acting on them. As difficult as it is at times, you’ve got to do it. That is why the lease is there; it clearly defines the terms, and the landlord is the one accountable for making sure those terms are met. Ultimately if the landlord is not accountable, then he has to accept the losses that occur. Be diligent in your collections; it’s ultimately for the better of both you and your tenant.

No. 6: Slow to hire, quick to fire

I had a corporate background prior to my career as a professional investor. We used to have a saying, “You have be slow to hire and quick to fire.” It means don’t rush to make hiring decisions, but at the same time when performance declines, be quick to address it even if it results in termination. I carry that learning into my career now. I modified the term and it’s “slow to lease, quick to release.” Take your time on the leasing process, even if you have to wait another week or month to get that long-term sustainable tenant – that’s slow to lease. Quick to release is really related to what we just talked about-following lease terms and collections.

No. 7: No room for unethical practices

There is a national reputation of landlords doing unethical things. It’s not a secret. It’s out there and it happens. There is no room for it and there should be no tolerance of it and it’s no way to succeed as a landlord. These unethical landlords have put themselves in positions where they have to be that way. They’ve made the wrong decisions. They have made the mistakes of the prior six points above, and it’s put them in a place that in order to preserve profits or mitigate losses they think they have to do unethical things. They cut corners, ignore tenants, they don’t do repairs, they engage in unethical collection practices, the list goes on and on. We hear about them all the time. You see them on the evening news. You read about them in the papers. It’s unacceptable and intolerable and it cannot become part of your business model, period.

Listen to Kevin’s full discussion of this here on blog talk radio.

[hs_form id=”4″]

Categories | Article | Topics
Tags |
  • Kevin Guz

    Kevin Guz is a Dallas, Texas-based residential real estate investor with more than 10 years of investing experience. He owns a HomeVestors (or “We Buy Ugly Houses”) franchise as well as the Clear Key companies, which focus on residential real estate wholesaling, rental property management and self-storage leasing. He also is a licensed real estate agent in the state of Texas. He enjoys sharing his ongoing personal experiences, perspectives and learnings from his start as a part-time or “weekend investor” and full-time corporate professional through his ultimate transition to a full-time real estate investor and business owner. You can listen to his podcasts at http://www.blogtalkradio.com/kevinguz.

Related Posts

0 Comments

Submit a Comment