#79: Don’t Make These 5 Landlord Mistakes

Foreign. Welcome to the Passive Income MD Podcast where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey everyone. Hope you're doing well. Since I've started this blog, the podcast and the Facebook communities, I've had a ton of people message me to let me know that they've taken the plunge and bought a rental property as a first time investor and they're just super excited about it. And honestly, that makes me super excited. You know, whether people are getting into real estate, whether it's active or passive, the fact that they're getting out there, trying something, figuring out ways to create other streams of income, especially that passive type income, and they're now on the journey to financial freedom and the journey to taking control of their lives, it gets me super excited. No matter what people have done, whether they bought a single family home, fourplex, huge apartment building, invest in passive again, whatever they've done, just the fact they've taken action, it makes me super excited. And I will say that I bought properties from very early on and built up a real estate portfolio. It's absolutely been one of the best ways to help me create wealth, right, Both in terms of money and in terms of time. Now, I know that I've talked about in the past and other people have talked about it, that one of the biggest deterrents to owning real estate is the notion that being a landlord is extremely difficult. It can be. There's definitely a learning curve there, but there are ways to leverage other people's experience, other people's wisdom, and try to avoid mistakes that people have made and, and try to make your path a lot easier. Some people take courses for that, some people read blogs and podcasts. Well, I thought in this episode I'd talk a little bit about some of the big landlord mistakes that I made. These are a little bit generic, but these are five big landlord mistakes that people should not make in the future. I can talk about specific mistakes, but these are a couple, like as you're starting on your journey that you should be looking out for. Hopefully you thought about these things actually before you got into the property. But if you're into property, make sure you're not making these five mistakes. Number one, the mistake of not hiring professional property management. Now, I know many of us, we're trying to maximize the profit that we make on our rental properties. And so we look at the idea of, you know, hiring property management and we look at the fees involved and sometimes that fee looks painful, right? It seems painful losing out on that percentage of gross revenue. You know, I will say oftentimes when it's a smaller type unit, one unit smaller apartment building might be somewhere in the 8 to 10% range. As you get bigger in scale, that percentage fee or cost tends to drop a bit, somewhere between 5 and 8%. But I will let you know that for all my properties except for the one, there's one single condo that we do own where we used to live during residency and that is one small unit and we have a long standing tenant there. You know, we self manage that one. But the rest of them we have professional property management. Now there are times where even with the single property, I wish we had professional management, but we've gotten through fine. I will say that for the other properties it is a no brainer to hire professional property management. And if anybody thinks twice about it, I'm going to try to shake that out of them as much as possible. Now your time is extremely precious and we've talked about that so much that your time is your most valuable resource and it's absolutely worth having someone manage it for you. Obviously time is the biggest reason. I mean, the last thing you need as a busy professional are calls. And these calls do happen, you know, to make decisions on the property if the property undergoes a big leak. I've been called for these. I've had two leaks this past year where I've even had management and I still got called as an owner. I can't imagine the stuff that the management has to deal with. I've had a fire at one of the properties and professional management had to take care of that. I can't imagine having to take care of that myself. Of course that fire happened on a weekend, as these things often do. And I am so glad I had professional management in there to take care of the situation and make sure all the tenants are safe, that our insurance policies are well, you know, well covered. Everything made sure to call the authorities, the proper authorities, whether it's fire, police and these kind of things. I can't tell you how glad I was in that moment to have professional management. Not only for your time. Right, because again, you don't want to get those calls, but also they just run the property differently than you do. Like a good company that's professional, they know how to truly maximize things much better than you do. They understand how to squeeze out the most profit. Right, Profitability. They know how to run these things. They know the current laws and regulations and state and local laws because that's absolutely important. And so I know that for many of you you're trying to save that 8 to 10%. But I will say that a good property management group will pay for themselves. In my opinion, they are worth 10, 15, 20, 25% in terms of return on investment. And for me, they're well worth the cost. And I've had to learn this the hard way. I've hired, you know, friends of the real estate broker, I've hired my friends who kind of live in that area who were willing to do property management for their, you know, on the cheap. But I will say you get what you pay for. I absolutely believe that now. So I now look for good property management with a great track record who can absolutely figure out ways to create some sort of return on investment for me when it comes to paying management fees. You know, there was one situation real quick where man, I mean we had one tenant where there were some issues in terms of legality, in terms of some of the things that they were doing and it affected other tenants. And I am so glad that our professional management had certain contracts signed, they understood state and local taxes and we're able to use those to ultimately get that problem tenant out. And that was made, really made possible by you know, having a professional person in place to run and manage things. So in any case, this should be a no brainer. I'm going to move on from this because I don't think there's much more to say about it. Number two, there's a mistake of overestimating your rental rates. I mean there is a definitely a certain pride that comes with ownership. And in many ways I think a lot of us, we tend to overestimate what we can get in rent. You know, maybe you've renovated the unit, you've redone the floors, the bathrooms and you are like pretty confident that people would be willing to pay more. And you know, we make our improvements right, sometimes thinking that all right, this is gonna get us a certain amount. The problem is that we are not the actual end user. We're not the consumer or renter in that area. You absolutely need to do some sort of direct, honest comparison with properties in that area with prop, you know, similar like and quality with same amenities and make sure to figure out what they are getting to help you determine what you're getting. Not just cause what you, not based on something you feel, but on Actual data and metrics. And then the question becomes, if you are trying to get a little bit higher rents and it's sitting there unrented, at what point do you decide to drop your rents to get it occupied? In my opinion, what I've learned, overall, it's better to have your place occupied for less, right, Than keep it unrented for a long period of time. Because as it's sitting there vacant, to be honest with you, it's not making any, any income. Like I, I show people like an example of like, you know, if you place rented a place for 600 bucks and you had it for 12 months, that's 7200. That's better than having the place rented for 650 for, you know, 10 months of that time, which is 6500. So you make up much better, in my opinion, having it rented out for a longer period of time. Now, you don't want to just drop it to barrel, you know, bottom barrel rates just to have it rented, but something that's reasonable, use your comps and get it rented and get people in place because that provides the cash flow that you need to live. Now, I'll tell you about example of how I screwed this up is that, you know, I felt our unit, especially the one condo that we had, should be renting for higher, right? And what happened is that I lost out on a bunch of potential great tenants. I, you know, there were some great tenants, but they didn't want to pay quite as much. They tried negotiate. I said no, it was small amount, but it was a principal thing. And so it ended up sitting vacant for quite a while. And I was paying mortgage on it, paying the cost, the carrying costs or whatever they call it. And it made more sense that I should have just dropped it to meet the demand and have it rented out and have good tenants in place. So since that point, especially with this unit and you know, some of the other ones, is that I've been very, very proactive when it comes to figuring out what is the demand for rents in that area, coming up with a realistic number and trying to get these things rented as soon as possible to great tenants. And since then I've had very, very little turnover time or whatever they call it, of places where it's sat, you know, vacant. And so that's provided really, really steady cash flow for me. All right, number three, don't make the mistake of not understanding the eviction process. Now. No one likes talking about evictions. I mean, it's come up quite a bit in the whole time of the pandemic about eviction moratoriums. And it can sound pretty cold and harsh. You know, these, these tough landlords who want to just put people out on the streets. I absolutely get that. That obviously we want people to have a roof over their head and no one likes the idea of not having, you know, kicking people to the curb. And that's not what this is all about. What I'm talking about is understanding what the current rules are in place, what some of the ways are to provide assistance for your tenants if they have some difficulty keeping up with the rent and, and then ultimately understanding what your legal rights are as a landlord in your particular county, in your particular state so that you can take action if absolutely necessary. And I'm not just talking about eviction for people who don't pay. I mean, there are sometimes some, you know, legal things happening at some of these units or they're a danger to other people. I mean. Yeah, I mean, I could think of a story. The reason I'm laughing is that so a friend of mine keeps talking about a tenant that they had in place that they found has a pretty bad history of having run ins with the law and on a violent nature. So they've been trying to get that tenant out. And so they don't. They didn't understand the eviction process and so they made it difficult until they got, you know, some legal counsel involved. Were they able to take care of that? And hopefully they've taken care of it by now. I haven't heard the update on it, but I will say it's important to understand what the legal environment is around the eviction process to understand what your rights are and how to do it appropriately should you absolutely need to. Number four, the mistake of underestimating the cost of repairs and maintenance. Now, this can be one of the toughest things to learn how to estimate these things correctly. I think many of us, again, we underestimate how much work needs to be done in these properties, like how many things actually break and need to get repaired and fixed. It's extremely important to know how these, you know, these costs go because it really affects your cash flow. It also affects your budgeting. You know, one of the biggest expenses or some of the, you know, things that we don't account for are some of these long term costs. Now it's easy to, I'll talk about what that is. But most of us are very good at like the monthly expenses of a mortgage, insurance, you know, basic gardening and occasional plumbing issues. But we seem to forget some of these longer, bigger, what they call capital expenditures, or cap X is what you might hear it. These are like larger scale maintenance issues. Like the roof has a lifespan of 30 years, for example. Like, when is that going to give out? Do you account for that every year? Right? A little portion of it? Do you sock some money away? The H vac system, you know, the air conditioning, heating, that sort of thing. Those things go after a while. Water heaters. Now these are big costs to replace. And the smartest way to account for these things is to put money aside in your budget to account for the lifespan of these items. That way, when it comes time to repair it, you've had that in your budget and you've prepared for it and you've kept money aside for it. Now, I've had to learn this the hard way because in some of my older properties and older units, big expenses would come up unexpectedly. I wouldn't be ready for it in terms of having money set aside in the accounts. So I had to dip into my personal bank account to pay off some of these things. Right. I didn't have a reserve fund for it. So now I've learned I've set aside X number of dollars per unit just to cover some of these expenses. And I'll promise you, like, other expenses come up over time. And so it's allowed me to have a better cash flow situation and have an, have an accurate idea of how these properties are producing in terms of cash flow per month. So make sure to make this a big part of your budget and have it accurately displayed in any sort of spreadsheets and profit and loss statements just so that, so you have it prepared whenever things tend to break. Right. And need to be replaced. Number five, this is a big mistake not treating it like a business. Now, my wife and I, we became accidental landlords when we, you know, we left our condo and we decided to rent it out. But we didn't treat it like a business. Like, we weren't looking at the numbers accurately. We weren't even accounting for, you know, all the expenses. We didn't even think about bookkeeping, tax issues, liability and asset protection. You know, we're lucky that we had great tenants and the property's in a great area, but we definitely didn't maximize the profit and make sure that the property was in good a shape as it could be. I think so many of us do this with real estate when it comes to owning our own rental properties. Like, we don't really come up with a business plan. We don't have a deep understanding of the numbers. We don't understand where the levers, you know, what the levers are to pull to improve the operations of the property. But ultimately, isn't that what it is like when you own a rental property and it's like running a business, like when you own your own active properties. It is more intensive than, let's say investing in passive investments. But because of that, some of the potential for returns, right, can be higher because it is like running your own business. But just like running your own business, if you don't pay attention to it, you don't study, you don't learn, you try to get better, you try to optimize. You know, if you don't treat it well, then it won't be producing what it should produce. So what I recommend to people, even if they're doing their own active investments, I tell them, look at a passive investment, like a syndication. Look at a simple, what they call the pro forma, where they do the projections and the, you know, of how the property will operate and run and look at all the line items there, look at all the assumptions that are made in terms of income and expenses. I believe that everyone, whenever they're an owner themselves of these properties, should know how to do something like that for their own property. Otherwise, to be honest with you, you're better off probably letting somebody else handle these real estate deals. But I know that many of you want to own your rental properties and I do as well myself. And so I've learned to treat it like a business and you know, it tends to perform a lot better. Now, like I've said, you know, mistakes are inevitable. I mean, owning real estate, it's like running a business. It's one of the greatest ways to acquire wealth. But there is a learning curve, especially as an owner and a landlord. I mean, the key is to not only learn from your mistakes and keep moving on, but it's also to learn, it's also important to learn from others mistakes. Right? And that's why you listen to podcasts like this, you read books, you talk to people in that community who are doing similar things that you're doing. You know, try to learn from them and avoid their mistakes because it'll save you precious time and money. Now I will tell you, it's not easy. None of this is easy. And it's not a get rich quick scheme. It's going to take some effort up front to figure out how to do this well. But definitely there's payoffs down the line. And that's kind of the the definition of passive income, right where you put a lot of your effort up front and the benefits tend to come later. That tends to be the case with active real estate and the less mistakes you can make, the better you'll be and the closer and the faster you'll get towards your goal. So good luck with everyone. Try not to make these landlord mistakes and let's talk again soon. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you a part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group Passive Income Docs and you can always learn more at our website passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.