I've been a San Francisco Bay Area landlord since 2005. The BIGGEST mistake landlords and property mangers make is not vetting your tenants like the CIA!
A bad tenant will make your life a living hell. They will pay rent late, ruin your property, invite guests not on the lease to ruin your property for months, cause disturbances with your neighbors, and make you wish you never owned your rental property.
Biggest Mistake Landlords And Property Managers Make
Landlords get lazy and just accept someone who talks a good talk without properly looking at their income, credit score, balance sheet, resume, and rental history. All these things must be checked, including speaking to their previous landlords.
I personally had enough of renting to 4–5 guys in 2017 (all I could get, trust me I looked) and sold my rental. It was generating about $60,000 a year after operating expenses and before taxes, which was a really tough amount of semi-passive income to lose.
But, thank goodness someone decided to give me an offer for $2,600,000! I countered at $2,780,000 and we finally settled on $2,740,000 with $10,000 in credit. That's a whopping 30X annual gross rent, or 47X annual operating profits.
Investing In Passive Real Estate Investments Instead
I reinvested $500,000 of the $1,800,000 in proceeds in real estate crowdfunding, which has a target annual return of 15%. In other words, if my various real estate crowdfunding deals in much higher yielding parts of the country (heartland) achieve their target, I will make $15,000 MORE income with $2,240,000 LESS exposure to a market that is softening. And best of all, the income is 100% passive.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common. You'll never have to make the biggest mistake landlords make if you invest passively.
Take a look at my two favorite real estate crowdfunding platforms. They are free to sign up and explore.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
A Good Rental Lease Agreement
If you want to check out a copy of a good rental lease agreement I’ve been crafting since 2005 when I first became a landlord, you can check it out here. The more bullet proof your lease, the better. It has saved me a number of times!
The biggest mistake landlords and property managers make really is not being thorough enough. Be thorough vetting the tenants. And be very thorough with your lease. If you do, you'll be much better because of it.
Being A Landlord Tests My Faith In Humanity
Sam, SF Bay Area Landlord Since 2005
About the Author:
Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1.5 million organic pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal.
The Biggest Mistake Landlords And Property Managers Make is a FS original post.