8 Common Mistakes Property Investors Make in Risk Management

Property Investment

Property might be one of the safest, most secure kinds of investment, but that doesn’t mean it’s totally fool-proof. It might sound pretty easy to be a landlord – buy property, rent property, and collect passive income – but that’s just not the case. In fact, the first big mistake many landlords make is assuming it will be easy. 

The most important part of any investment plan is risk management. In order to comfortably and successfully invest and ensure a profit for yourself, you need to mitigate your financial risk. As a property investor, there are various ways to reduce your level of risk. By neglecting these measures, you might find yourself in a position that’s not just inconvenient, but downright damaging. You could face increased management-related costs, government fines, or legal trouble and the fees that come with it. If you’re a landlord or an aspiring landlord, and you’ve never thought too much about risk management, pay close attention.

1. Not Complying with Local Regulations

Property ownership is already subject to legal conditions, and you’ll likely be even more scrutinized as a landlord. Many landlords end up paying because they don’t make enough of an effort to maintain compliance with local regulations.

Not complying with local regulations, like building codes, may very well earn you fines from the city or county where the property or properties are located. Even more concerning, though, is that violating regulations may give your tenants grounds to legally break their lease and even sue you.

2. Being Overly Optimistic About Occupancy

Going into the property investment business may be one of the more solid ways to invest your money, but being a landlord isn’t always going to be lucrative. Don’t make the same mistake so many speculators have done and assume the rental market will serve your needs. You might not always be able to maintain occupancy, and that’s a serious blow to your margin.

Before becoming a landlord, you need to make sure you have a reasonable enough emergency budget to accommodate vacancies. Get a headstart when you’re expecting tenants to move out and invest in advertising for your rental unit, or have your manager take care of it if they offer that service.

3. Having Too Much Faith in Your Tenants

If you’re trying to minimize risk as a landlord, it’s important to limit your expectations of people. Your tenants might be responsible and trustworthy people, but they might not be. You can’t rely on handshakes and first impressions alone. It’s important to run background checks and financial checks on applicants for this reason.

Background checks are useful because they allow you to screen for criminals, especially violent offenders who might bother or harass other tenants and yourself. It’s doubly important to run financial screening, since a poor credit score, especially given today’s worsening mortgage affordability, is a good indication that someone might not be financially solvent enough to afford steady housing. If a seemingly good applicant doesn’t meet your background and financial criteria, see if they can offer a reasonable explanation.

4. Failing to Meet Fair Housing Standards

The Fair Housing Act of 1968 is a hugely important piece of national legislation, mandating that housing providers can not use race, religion, national origin, family status, or disability status to reject tenants. Not meeting fair housing standards finds landlords in court all the time, the subjects of lawsuits by prospective tenants.

Always make sure you never give a reason for tenants or applicants to suspect you of housing discrimination. Treat all tenants and applicants the same, and never ask illegal discriminatory questions during the application process.

5. Trying to Manage Your Own Property

One of the classic risky moves made by fresh landlords is thinking they can handle every aspect of property management themselves. More often than not, this ends up costing them in multiple ways. Property management experts Utopia Management highlight some of the most common ways a strong manager saves more money than they charge:

  • A new rental owner usually underestimates the amount of time required to manage repairs, marketing, payment collection, tenant communication, contractors, showings, etc. This leads to poor landlord-tenant relations. 
  • Spending too much time on an investment makes it no longer “passive” and prohibits growing a portfolio. 
  • New investors aren’t familiar with legal requirements in leases, in applications, and in evictions, which can be costly. 
  • Property managers get repairs and maintenance done cheaper through years of relationships with contractors and vendors. 
  • Tenant retention strategies and simple 24-7 availability translate to less vacancy time which translates to more rental income

The standard fee for property management is 8-10% of the monthly rent. A wise investor budgets for this upfront.

6. Not Putting All Communication in Writing

Of course, sometimes you really can keep a lid on everything yourself, as is the case with many small-time landlords. If you’re renting your mother-in-law suite, converted garage, parked RV, or another rental unit that’s on your own residential property, that might be you. Or you just might be a naturally talented landlord with the time to spare and easygoing tenants. Either way, it’s not impossible to do it on your own, but whatever you do, always communicate in writing with your tenants.

Not putting all communication in writing is a serious no-no that can and will come back to bite you, whether it’s in the court system or at your own front door. Even if you speak with your tenants in person or over the phone regarding issues like repairs, complaints, or anything else involving the rental, make a duplicate communication in writing, be it email or paper – though email is best, since you won’t lose your own record of the communication.

7. Not Paying Attention to Your Tenants’ Needs

As the owner of a rental property, you’re legally responsible for the status of that property in regards to your tenants’ health and safety. While your tenants have a legal obligation to obey the terms of their lease, you have an obligation to maintain a safe living environment for them. Being neglectful can land you in hot water.

Avoid lawsuits and court fees by staying on top of things. Check in with your tenants frequently, and when they call, email, or text you about something, whether it’s a complaint or a request, don’t keep them in suspense, and do what you can – or have your manager do what they can – to remedy any problems. At the same time, make sure you give them space. Don’t enter the rental without due warning, and be aware of your local laws about tenant privacy, because it may even be a bad idea to show up outside unannounced.

8. Treating Your Properties Like Casual Investments

Last but definitely not least is the cardinal sin of property investment: treating it like a casual venture. 

An investment property is not a stock, and it’s not DogeCoin, either. Properties are more like crops you need to water and replant regularly. “Passive income” does not equate to “passive investment.” If you want to make money with your property as it slowly builds value, you need to be proactive. Setting yourself up with a second mortgage, without a real plan for renting and maintaining your new property, isn’t just risky. it’s basically a guarantee that your investment will actually cost you money, leaving you frustrated and worse for wear.

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