With rising interest rates, a falling real estate market, and general economic uncertainty, it is more critical than ever that your investments perform. As a landlord, protecting your investments by knowing the rules and your rights. In chapters 12 – 16 of my book ‘Look Before you Leap, But Leap’ I discuss property management and will put this advice into the context of the current market with my top 5 mistakes for landlords to avoid.
1) Not Knowing Rental Tenancy Regulations or Housing Laws in Your Area
As housing affordability (or lack thereof) is top of mind for so many home buyers, all levels of government, municipalities and countries are closely looking at this situation. In many cases, governments are adjusting the regulations. Things like removing the ability to do short-term rentals, imposing taxes, and recently, as you may be aware imposing rental increase caps that do not even come close to matching the rate of inflation. It is imperative that anyone providing rental housing stay informed of the current and proposed housing laws and regulations from all levels of government in municipalities in which they own rental properties. Google searching something like rental housing regulations (and adding the city) and then creating an alert would be a way to keep on top of changes.
2) Not Understanding Your Local Market Conditions
Again, with the Bank of Canada interest rate hikes and the subsequent effects on mortgage financing, the housing market conditions have and continue to change quite significant. Many home buyers’ purchasing power was considerably reduced. There is a level of concern and even fear in the housing market. This evolving housing market condition isn’t unique to any one market. Although, the most overheated markets are experiencing the biggest changes which make sense, while the more affordable markets are less affected. This whole situation has resulted in significantly decreased housing sales, price reductions, and more demand for rental. It is your best interest to know the market conditions of your rental properties so that you can adapt and adjust so that you don’t fall behind. This especially important for those markets that have significant rental regulations. Review the various rental websites for you location like, kijiji, padmapper, rentfaster, Zillow (to name just a few) as reference site for rental rates, demand and supply across the various housing categories, to better understand the market conditions, how they are changing, and what you can do to.
One last note is to also understand that in these changing rental market conditions, you may run across “Ghost ads” which are essentially test rental advertisements conducted by the person want to determine the market response to find the right price point for their rental listing.
3) Not Conducting a Proper Tenant Screening
This particular mistake is a BIGGY! In fact, it can make or break you in many ways. Let me start by saying not all potential and active tenants are out to take advantage of you as a landlord, BUT there are professional tenants that know the rules and are very good at their game, and the best way to avoid dealing with them is to prevent the possibility of those individuals from becoming your tenant. The way to do this is to conduct your due diligence on each and every shortlisted potential tenant. There are service providers out there that you can enlist such as Tenant Verification Service or The Front Lobby that will do much of the work for you for a fee, but there no substitution for conducting a face to face meeting with your prospective tenant. Remember you are providing them a home in your property and yet you have significant related liabilities for which you are responsible such as mortgage payments, property tax payments, and the neighbouring properties.
Not following through on any part of the background check is probably the biggest and most costly mistake area in the whole screening process, because once you have a less than ideal tenant in your property, the situation can deteriorate quite significantly. Not only should you check with all references and the tenant’s current landlord (ask that landlord if the tenant consistently paid the full rent on time), but also it is important to get feedback from the previous two last landlords, as they have no further stake in your prospective tenant. Read their application to make sure there is consistency with what they wrote. Here’s an example of what I mean, let’s say they state that they don’t have a pet, but you notice pet hair on their clothes, that could be an indication that they do have a pet and they are not being truthful.
Another mistake in this category is not obtaining proof of income, for which there is no excuse but it still happens. When I hear stories that the that the tenant rent cheques are NSF and the landlord didn’t verify this info because they didn’t feel that it was necessary as the tenant seemed nice, looked good, spoke well etc., I have very little sympathy for the landlord as this situation would likely be prevented had they completed their prospective tenant due diligence.
CASH THE DEPOSIT CHEQUE AS SOON AS YOU RECEIVE IT! This is a worthy test before they actually are in your property.
Not conveying your expectations ahead of time is another part of this tenant screening process, because your prospective tenant needs to understand what the landlord’s responsibilities versus the tenant responsibilities are, how frequently you may wish to inspect the property with proper notice, forms and frequency of communications to each other during the tenancy, etc.
4) Not Treating Your Rentals Like a Business
This may be the most important mistake to avoid because it really incorporates all the previous points, and then some. It truly is a business that involves income, expenses, suppliers, service providers, “clients” (tenants), taxes, and reporting. Communication with various involved people, entities and governing bodies is a critical component. As a business with proper reporting, it is always in your best interest to do the math i.e. proper budgeting for the rental property so that you reduce your risk of negative financial surprises. I have seen investors and investment proformas that are so optimistic that they fail to account for vacancies, realistic repairs, and maintenance, increasing financing and operating costs, property taxes as many are experiencing now. This is not only stressing out the investors, but some are actually finding themselves going financially backwards and may eventually have to sell at a loss because the market conditions are not favourable, and they can’t financially support holding the property. It is massively important to do your budgeting ahead of purchasing the rental property and keeping the budget up to date for the current and anticipated conditions. It pays dividends to be realistic and even conservative so that you are not only set up to take care of your downside risk, but you are also able sleep better at night.
Sometimes friends or family members that may need accommodations and so you may feel an obligation or that it is okay to be more relaxed because you know them or “they’re family”, but again, this is a BUSINESS. I am adamant about this business point; DO NOT rent your property to ANYONE without having them sign a proper lease or rental agreement in advance. As previously mentioned, you need to conduct your entire proper tenant due diligence, communicate your expectations and get a security deposit.
Another area of treating your rental property as a business is complacency. One of the areas of complacency that in the past I have even been guilty of when I owned locally, and I have seen investors so many times not conducting regular inspections of the property. It is something that over time after a few inspections we think to ourselves “it’s going to be a waste of time” as the property condition always looked acceptable in my past inspections. As I found out personally in the past this is not the case, as things change in tenants’ lives like they do in ours. If you don’t want to conduct the regular inspections there are professional inspection companies, like CTI Services which are in the lower mainland that will conduct regular inspect the properties for you.
Insurance is an integral part of any business and the rental property sector is no different. In fact, lenders require that the landlord carry adequate insurance coverage for the property. You also need to disclose to your insurance company that the property is rented and that you have the appropriate insurance coverage. Failure to inform your property insurer of it being rented could be disastrous in that time of need for insurance coverage.
Requesting proof of your tenant to carrying valid tenant insurance is a prudent piece in treating your rental property as a business. In many cases, this requirement of the tenant carrying valid and current tenant insurance and providing proof to the landlord is a condition of the tenancy or rental agreement. I always recommend, wherever possible, to regularly check with the insurance company that is carrying the tenant policy that the policy it is still in effect.
Lastly, many landlord insurance companies require regular inspections throughout the year and may request proof of such activities.
5) Not Knowing When to Hire a Professional
Knowing your strengths, weaknesses, likes, and dislikes when it comes to owning investment properties is an imperative component part of being a successful landlord. Sometimes the properties in which you invest are difficult to regularly travel to or are not in your location, so you need to consider adequate management. Not knowing when to hire a professional management service can be a massive and expensive mistake. I call it tripping over dollars to pick up pennies. As a landlord, being financially short-sighted can be a very dangerous game to play. Many investors understandably want to keep their expenses to a minimum and yet some feel that management can be expensive, but in my experience not having your property professionally maintained and managed when it is not viable to directly manage them can be far more expensive in the long run and it can actually prevent the landlord from increasing their profitability and portfolio expansion.
In closing, as real estate investors we always have better chances for profitable when we are equipped with knowledge on foundational topics like this. In my ‘Look Before You Leap, But Leap’, the importance of understanding property management and variety of other real estate fundamental subjects are presented to prepare the reader for success. It is a great reference book for real estate investors. If you or someone you know is just starting to invest in real estate this is an excellent resource to have. Buy it here. All net proceeds go to causes that are close to my heart.