7 financial pitfalls every landlord should avoid
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As a landlord, there are often several moving cogs that you need to keep on top of to keep your financial investment moving along swimmingly.
Financially, if you’re not careful about your investment, then you could be losing precious profit that does real damage to the potential returns you could be gaining now and in the future.
Whether you’re a new landlord or you’re someone who has several properties, it’s good to be aware of the financial pitfalls every landlord should avoid.
1. Underestimating all costs
Many landlords will fail to budget for all the expenses that come beyond the mortgage. Depending on how much you owe to the banks or lender specifically, you may find that the rental income is only just covering your costs.
If it’s only just covering your mortgage costs, then there may be several other costs that you have to factor in, too.
These include:
- Maintenance and repair work
- Insurance
- Property taxes
- Letting agent fees
Failing to account for these will often lead to the erosion of your profits. That’s why a contingency fund is highly useful to establish, and a common rule of thumb is to set aside 1% to 2% of the property’s value annually for any maintenance work that might need doing now or in the future.
You never know what might come around the corner, too, when it comes to repair works and general maintenance to keep your rental in good condition.
2. Failing to budget for the void periods
There are likely to be some void periods within your rental where you’re having to front the cost of your mortgage on the property, as well as any existing expenses that you’re paying for. Now with the majority of landlords having their own home with a mortgage to pay for, having to take on another mortgage payment of substantial amount can lead to financial ruin.
It’s therefore important that you’re budgeting for these void periods as much as possible. Planning for these void periods can be done by setting aside two to three months’ worth of rent so that if your rental isn’t being used and you have yet to find a new tenant, then at least you’ll be covered for a brief period of time.
3. Inadequate tenant screening
If you’re rushing the tenant screening process in order to fill a vacancy as quickly as possible, then this can certainly pose a major financial risk.
Problematic tenants can often lead to late or unpaid rent. There’s costly property damage, expensive and time-consuming eviction processes, too.
Thorough credit and employment checks, along with references, are all essential to secure reliable tenants now and in the future.
Vetting your tenants can provide a great deal of peace of mind that you’ve got the right people in your rental. Make sure that if you have a lease agreement, the tenants are agreeing to adhere to this, such as not having a pet, if it’s mentioned in the document.
4. Ignoring tax obligations and poor record-keeping
Ignoring tax obligations is something that can cause a lot of financial fallout for yourself, but it can be something that can get you into trouble.
Not understanding those tax obligations isn’t an excuse that you can use either. You’ll be expected to know all of your tax obligations and make those payments to be a landlord.
Failure to keep accurate and detailed records can also lead to significant financial penalties, as well as fines and even legal action.
Landlords must be able to track all income and allowable expenses. It’s helpful to think about what expenses these include, from legal fees to insurance premiums and maintenance on your property.
A tax specialist with knowledge of property or rentals is helpful for the sake of compliance.
5. Incorrect handling of security deposits
Photo by Andre Taissin on Unsplash
Landlords are often required to legally protect their tenant security deposits. This can vary depending on where your rental is and in what country you’re in. However, for the most part, tenant security deposits should go into a government-approved tenancy deposit scheme or somewhere that you can then return said deposit at the end of the tenancy.
By incorrectly handling security deposits, you’re potentially risking your ability to rent as a landlord, and this can get you into a lot of financial and legal trouble if you’re not doing it properly.
Your reputation as a landlord is something you want to uphold, too, and if you’re not looking after your renters’ deposits, then news of this will likely spread fast, and you may struggle to get renters into your property as a result.
6. Not having proper landlord insurance
Landlord insurance is something that you want to be well aware of when it comes to protecting your investment. Standard home insurance is not suitable for rental properties, which is why you want to get specialist landlord insurance instead.
These specialist insurance policies will cover building and contents, if it’s furnished, public liability, and potential rent arrears or vacant periods, to ensure your investment is protected from any unforeseen events and lawsuits.
7. Disregarding legal responsibilities and regulations
As a landlord, legal responsibilities and regulations are something you want to be very attentive to as a landlord. The rental market is heavily regulated, and as a result, you must be aware of when these laws change and how you should be adhering to any of the above as a landlord.
There’s the potential impact that comes from the renters’ bill in the UK, and there are likely to be changes elsewhere in the world, so regardless of where you’re located, it’s important to try to adhere to safety standards.
From having the right certificates to following proper eviction procedures, these can result in substantial fines and legal disputes, too.
There are many financial pitfalls that can be faced as a landlord and that you should be well aware of. These financial pitfalls will help prevent you from losing out on your investment and ensure it remains a strong financial asset now and in the future.