How to Avoid the Most Common Mistakes as First-Time Landlords
Using your self-directed IRA or Solo 401(k) capital to invest in real estate can be a great way to secure your retirement future. You get to control your own retirement funds, choose your own investment properties, and avoid all the hassle of submitting paperwork and waiting for administrators to process each transaction.
However, the degree to which your strategy succeeds depends on a number of factors. Some of these factors are out of your control, such as capricious housing markets or natural disasters, but those are outliers that are not likely to have much day-to-day impact on your investments. The most crucial factor contributing to the profitability of your real estate portfolio is what you do to maintain your investment properties.
Many new real estate investors are captivated by the potential profits, but neglect the core principals of effectively managing real-estate investments. The profitability of your investment hinges on following best practices and with the right approach, your chances of success are much higher. Since you should always begin as you mean to go on, it is important to start your investments on the right foot. With that in view, let’s begin by examining the most common pitfalls for first-time landlords and how to avoid them.
Pitfall: I Treat My Property Investment Like a Hobby
Remedy: Treat it Like a Business
Buying a house and fixing it up can be an enjoyable pursuit, but when you use your hard-earned retirement capital to invest in rental property, you are not doing it for fun, you are working to secure your financial future. A real estate investment is a business that must turn a profit and if you neglect to treat it as such, you could wind up losing a lot of money. This means doing your research, hiring professionals where you need them, keeping your accounts in order, staying on top of your taxes, and knowing your rights and obligations as a landlord. If you take your investment seriously, it can be a rewarding and profitable part of your retirement plan.
Pitfall: I’m Overwhelmed by Expenses
Remedy: Prepare Exhaustive Estimates
The most common mistake new real-estate investors make is failing to find out what recurring expenses and potential unexpected expenses they should work into their cash-flow plan. Underestimating regular maintenance expenses can be a costly mistake, and if you are not prepared, the costs for unexpected repairs can devastate your ROI. Fortunately, you can avoid this future pitfall with a little extra legwork now. Have the property thoroughly inspected, consult professionals or others with experience maintaining properties, and research all the costs. Then, use that information to make detailed estimates of your potential expenses and be sure to account for them when you are assessing your cash-flow needs.
Pitfall: My Vacant Property is Eating up My Capital
Remedy: Structure Your Cash-Flow to Cope with Vacancies
Having your investment plan upset by an unanticipated period of vacancy in your property can be distressing emotionally and financially. However, this is another pitfall that can be avoided by doing some financial due-diligence at the outset. A simple cash-flow analysis can help you form a realistic picture of your financial situation and ensure that you will have sufficient funds to sustain the property if you are lacking tenants for a time. This will also help you maximize the returns on your investment and avoid serious financial hazards like foreclosure.
Pitfall: I Finally Found Tenants, but Now They Can’t Pay the Rent
Remedy: Properly Screen Potential Tenants
Neglecting to properly screen tenants is a surprisingly common pitfall for first-time landlords. It’s true that you want to get tenants into your property as soon as possible so that it can start generating income. Many new investors think that they will save time and money by skipping the full background-check process, but proper screening is one of the most important things a landlord can do. Ensuring that you have reliable, financially stable tenants is absolutely essential to the success of your property investment, so don’t sabotage your retirement future by skimping on this step to save a few dollars in the short term.
Pitfall: I’m in Some Legal Hot Water Over My Property’s Hot Water
Remedy: Get Familiar with Laws and Local Housing Codes
Failing to understand basic rental laws and housing codes can get you into some serious difficulties. Remember, a rental agreement is a legal contract and as a landlord, you will be responsible for ensuring that your property and procedures comply with applicable laws, as well as a number of state and local health and safety standards. If you don’t, your tenants may be within their legal rights to break the lease agreement or even sue you for neglect. Since landlord-tenant laws vary in each state and city, it’s crucial to fully educate yourself regarding local statutes. It’s also important that your lease agreements and other forms comply with the laws in your area, so don’t use generic forms. This isn’t as daunting a task as it may seem, however. You can consult with a landlord-tenant attorney, and you can get a lot of the information you need from local or state landlords’ associations. Remember, the law is there to protect you and your investment property, so make sure you stay on the right side.
Pitfall: My Tenants Don’t Complain, so Everything Must be Fine
Remedy: Don’t Neglect Your Tenants
A common mistake we all make is assuming that if no one complains, nothing is wrong. But for landlords, this can be an expensive assumption. Once you have tenants in your rental, it’s important that you continue to pay attention to the condition of the property. They might not always tell you when something isn’t working well or needs repair, so make sure your property manager keeps up with periodic maintenance and inspections. This isn’t just necessary to the happiness of your tenants, it’s also the best way to ensure that you don’t incur those pesky unexpected repair costs that can be prevented by regular upkeep.
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