When I first started scaling my rental properties, I was in over my head, working 18-hour days and spending too much time away from my family as I tried to fill vacancies and handle tenants professionally. My rental business was supposed to bring me more money and freedom, not cost me those things!
But with an effective property management system, I finally have time to spend with the people I love, doing the things I enjoy. In this post, I’ve outlined the five biggest mistakes that rental owners make — and how you can avoid them.
Just because you can enter a deal doesn’t always mean you should. Instead, take time during your cash flow analysis of a certain property to ensure that you’re not making the wrong assumptions about how much money you’ll make or spend. Here are a few things to watch out for when you’re thinking about investing in a property:
If you’re still considering a real estate deal after going through your cash flow analysis, make sure you budget for every line item — for example, paying someone else to complete maintenance tasks, collect rent, mow the lawn, and so on. Otherwise, you’ll end up creating a bunch of little jobs for yourself and spending too much personal time on your rental.
By leaving enough margin in your property deals to pay for staff and services up front, you won’t have to do everything at the rental yourself. I suggest these conservative monthly estimates for revenues and expenses that follow my cash flow analysis (and allow for margin to grow while freeing up time).
Net Income/Loss: $89 Loss
Nobody wants to be losing $89 a month on their property, but here are some benefits you’ll have:
There are worse deals out there than this example, but there are better ones, too. Try to only buy properties that bring in more cash than the principal payment you owe each month. Then, you’ll at least have a positive cash flow as long as rent is still coming in.
Once you start bringing in revenue, it’s important to set money aside each month for expenses like repairs and CAPEX. You hopefully won’t have to deal with these every 30 days, but it’s better to be prepared and leave yourself a cushion in case things go south.
I suggest setting up a maintenance bank account for your property so you’re not tempted to dip into your cash flow. A monthly deposit of $6,000 to $8,000 for repairs seems high, but this reserve can help you keep operating efficiently if a resident moves out and leaves the place a mess, or if an unexpected (and costly) repair pops up.
One thing to keep in mind: If you’re in acquisition mode for a property, the bank will require you to have three to six months’ worth of mortgage payments (principal, interest, taxes, and insurance) as cash in your account. The bank will also accept a cash equivalent, like an IRA or a whole life insurance policy, for reserve.
Setting cash aside is also helpful if your lines of credit get shut down for some reason. If and when you’re running low on working capital — the money you use to operate your business every day — you’ll want to have cash reserves on hand so you don’t have to rely on credit cards.
I made the mistake of continuing to invest in more properties and relying on my lines of credit instead of setting cash aside for worst-case scenarios. And when the Great Recession hit, that was my worst-case scenario. Because my money was tied up in struggling credit lines, I couldn’t buy paint, cleaning supplies, or anything for my rentals. I was even down to my last few gallons of gas because my credit card was declining at the pump.
In that moment, I realized that owning 92 rentals wasn’t worth being unsure if I’d make it home. And if I’d been setting aside emergency cash instead of depending on credit cards, I never would have been in that situation.
Many rental owners struggle to admit they need help managing their properties and can’t do everything on their own. This will lead to you hiring yourself for all the little jobs that need to get done, and it won’t do anything to grow your business or free up your time. It’s the same mistake I made before I decided to implement consistent systems.
My mistakes led me to step back and determine my vision — that is, what I was trying to accomplish in the first place. I then built my property management system (my infrastructure) and clarified my process for running my rentals.
With this VIP Method (Vision-Infrastructure-Process), I was able to stop pouring so much money into my properties and start making time for life outside of business — like my wife, kids, hobbies, and other things I love. And now, I get to teach others this method so they can avoid the mistakes I made, grow their portfolio, and get their personal life back.
We all mess up from time to time as we build our rental property businesses. In this post, I’ll show you how to steer clear of a few common pitfalls.