Owning a rental property and generating extra income from your place sounds like a great plan — everyone is looking for some great, passive income stream.
While the prospect of rental income is motivating, there’s a lot more that goes into successfully managing a rental property. Som the question is: how do you effectively manage a property enough for it to generate a good side income, geared perhaps towards retirement?
If you’re thinking about making an investment, check out the five common mistakes landlords make, which you should work very hard to avoid.
1. Ignoring the Importance of a Property’s Location
Treating your rental property as a business requires you to think hard before even purchasing it. Is it located in a prime location, let’s say Chicago or New York, that has a huge influx of potential tenants? This is important because if you buy a property in a location with poor tenant demand, it will definitely negatively impact both the rental price and the type of tenants you get.
Out of frustration, you might end up leasing your property out to someone whom you don’t like, and at bottom-barrel prices too.
An important quality of good rental properties is the ability to rent it out fast without any headaches, and buying a property close to major economic and educational hubs of growing cities is highly recommended. This way, your rental property appeals to a wide variety of tenant — students, young professionals, commuters, etc., many of whom would make fantastic tenants. It is always recommended that you purchase your investment property using the help of local realtors, unless you’re a real estate expert. To find the best local realtors in Canada and the U.S. you can use services like Wowa and Homelight.
2. Finding a Great Mortgage Rates
Finding suitable mortgage rates will keep you from becoming financially overstretched, as the main cost of a property is the mortgage interest which the landlord pays for the house. As much as possible, decrease this cost by searching for the lowest mortgage rates.
As of today, mortgage rates in the U.S. are extremely low, so perhaps now is a great time for your first real estate investment.
3. Paying Out Mortgage Fast
It seems like such a noble feat to clear off your mortgage very fast, but does it have any actual benefits for you? Not really.
When you pay off your mortgage fast, it means you can’t use your mortgage monthly payments as a cost of rental properties, and a bigger part of the rental income becomes taxable. Here’s what you can do if you have extra cash: pay off the mortgage on your principal home instead of the one on your rental property if you have those options. But be sure to talk to your accountant before doing anything specifically for tax purposes.
4. Lazy Background Checks for Tenants
An eagerness to get tenants into your house and earn a rental income shouldn’t make you rush into an agreement with a tenant without conducting a thorough tenant background check. Checking through the potential tenant’s credit report for a history of late payments, verifying their references from previous landlords and employers are essential parts of the process, even if this tenant doesn’t seem like a defaulter. Allowing yourself to get pressured will likely cost you a lot in the long run.
5. Thinking You Can Do Everything on Your Own
Hiring a good rental agent to help you sort out tenants and complete their background checks will help you focus on other things in your life. Maybe you can use this time to source more upcoming deals?
The same goes for a property manager who helps you avoid the headache of running a rental property, such as repairs and property maintenance, on a daily basis. But if you think you can handle it all on your own, you’re likely to fall into a multitude of headaches throughout the year.
Making certain mistakes as the owner of a rental property can, and will, cost you a lot. Knowing how to handle mortgages, delegating responsibilities, conducting proper background checks on potential tenants and choosing a home in the right location are tips to save you from making bad choices.
Make sure you cover all your bases and good luck with your investment!