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First-time property rental can be a minefield for new landlords because there are quite a few mistakes you can make, resulting in costs and potential penalties. However, you can also avoid some of the worst problems when you know what to watch out for. So, from setting aside enough for maintenance to understanding insurance, here are some handy suggestions.
Inaccurate Screening of New Tenants
One of the most important parts of renting property is ensuring you have reliable tenants. But this is one of the hardest things to get right because bad people can be good liars. So what can you do? You can use screening services to run a tenant credit check that looks into their background in terms of handling money. This can feel like an invasion of privacy, but you have the right as a landlord to check the suitability of tenants you are allowing to rent your home.
First Time Property Rental Maintenance Costs
It is often recommended that landlords set aside between 10% and 20% of a home’s value for annual maintenance costs. However, the truth is that this fluctuates, and you can often need much more, and the real figure is actually around 30% because of high-maintenance systems:
- Systems like HVAC and plumbing can break down suddenly, requiring emergency repair.
- The cost of calling someone out for an emergency repair has skyrocketed recently.
- You can offset these costs with proactive maintenance and an emergency fund.
The Costs of Empty Properties
An empty property is pretty much the worst thing you can have (aside from a non-paying tenant) as a new landlord. When a vacancy sits, it doesn’t generate any income, but that’s not the issue. The real issue is that even though the property is empty, you still have to pay your expenses. This includes the mortgage, property taxes, utilities and even insurance. In addition, you also need to still pay a marketing agency for a listing, all while the house is awaiting a new tenant.
Compliance and Regulation Expenses
The housing market is very heavily regulated in countries like the UK, and non-compliance can lead to many legal issues that result in massive financial penalties. One of the biggest examples is the energy performance certificate that assesses the environmental impact of a property. There are also multiple safety inspections that a property must pass before it can be leased to a tenant, and failing to meet any of these can result in long-term delays from rental income.
First-Time Property Rental Self-Management Issues
Most new landlords believe they will save money by managing properties themselves, and this can be true. However, the reality is that you will need an agency for cost-effective real estate management that works, as they have access to the tenants and reliable market data.
Reduced time and stress
Managing property can be stressful and takes a lot of time, which can be draining if you also need to work full-time, as most new landlords actually do. An agency will handle all the work.
Local expertise and knowledge
Landlords must understand specific rules, knowledge and systems, and you can end up in legal trouble if not. An agency has staff who understand the local and national housing regulations.
Faster leasing and lower vacancy
Filling a home quickly is ideal, but it isn’t as easy as some new landlords think. An agency can help with vacancies as they have the websites, media and staff to present properties.
As a new landlord, it can be overwhelming to see just how much work goes into managing even a single property. This can be frustrating if you have family commitments and full-time work, and it can drain your funds. An agency is always the best way to go to avoid common problems.
The Vital Emergency Cash Buffer
There are many variables when managing and owning property that most don’t even know about until they experience them. Mortgages and interest rates are prime examples, both of which can fluctuate under certain conditions and can affect the housing market. However, there are also major repairs that properties need to undergo. Getting caught short without the funds to cover these costs can be a nightmare, so you will need an emergency buffer to cover them.
Rules About Allowing Pets at Properties
At first, it can seem like a good idea to ban pets from your property, but is it really valuable? The reason is that some landlords believe a pet will ruin the place, and of course, this happens. However, most pet owners are highly responsible and will even pay for repairs to damage made by their pets. Also, you will automatically disregard a large potential tenant base from your vacancy, as many people today have pets, and pet owners typically stay at rentals for longer.
First-Time Property Rental Insurance Mistakes
One of the biggest mistakes that around 25% of new landlords make is misunderstanding insurance. Many believe that homeowners’ insurance covers rental properties, but it doesn’t. If a tenant is injured in one of your homes, an insurance claim will be denied. So, here’s what to do:
- Insure with dwelling coverage that handles claims for fire, flooding and bad weather.
- Take out liability coverage that can cover legal costs and tenant medical expenses.
- Apply for loss of rental income to keep cash flowing while a property is empty.
Misunderstanding Net and Gross Yields
The math of yields can be one of the hardest to understand, and most new landlords grossly miscalculate the profits they are actually making. Of course, you can use an online rental yield calculator for an overview. However, it is important to understand the actual costs of renting a home to be certain you have the correct figures. For example, the average payout from profits is between 25% and 45%, and that comes out of your end after taxes, fees and maintenance.
Summary
Poor tenant screening is one of the worst hidden traps of first-time property rental that can surprise new landlords. Some also think that self-management is easier and cheaper, but an agency is vital, and you also need to understand the net and gross yields when renting property.