Buy-to-let properties can be a great way to boost your residual income and supplement your regular earnings. However, becoming a landlord isn't as easy as simply buying a property and renting it out. Unfortunately, many landlords don't realise this and make common mistakes that affect their profit-earning potential. Below are three critical mistakes you must avoid when starting a property management portfolio:
Forgetting to Monitor Cashflow
Many new landlords don't realise that running a successful buy-to-let portfolio is much like running a successful business. When starting out, you have to remember that each property you invest in is intended to be a source of profit, so it's vitally important that you keep an eye on your cashflow. This means tracking your income and expenditure, which enables you to make projections about future investments, should you choose to expand your portfolio.
Keeping an eye on your cashflow also ensures that you have enough money in reserve for sudden emergencies, such as faulty boilers or roof repairs. These repairs are commonplace when you start up your buy-to-let portfolio, so it's important to have enough money in the bank to keep your tenants happy.
Having a suitable reserve also allows you to ride out periods where you are searching for a tenant. If your current tenant leaves, you will have to pay the mortgage yourself, as well as any additional costs that may crop up, such as utility bills. If you don't keep an eye on your cashflow, these tenant-free periods can eat away at your income, which can cause significant problems down the line. Therefore, make sure you keep a spreadsheet of your income, expenditure, profit and loss. This will give you the foresight you require in order to manage your properties with the necessary care.
Choosing the Wrong Tenant
As mentioned, empty homes can become a major leak in your portfolio if your buy-to-let properties are without a tenant for a lengthy period of time. Most landlords recognize this, which makes them extremely eager to secure a tenancy when their previous tenant hands in their notice. However, whilst it's important to secure a long-term agreement as quickly as possible, it's also important that you find the right tenant for your property.
Tenants are the bedrock of your portfolio, and a great tenant can make your life that much easier. Typically, if a tenant is happy, they won't have any reason to leave the property unless they are relocating or have a sudden change in their family life. Therefore, it's important that you maintain great relationships with your tenants to minimize the chance of going through a "void period" in your property. Some things to remember are:
Try to build a personal relationship with your tenant and let them know they can contact you if any problems arise.
Be open to relaxing the rules slightly for the right occupant. For example, many landlords have a strict no-pets policy for their properties. If you find a great potential tenant, but it turns out they have a cat at home, consider relaxing the rules to secure a solid long-term agreement.
Handle problems quickly and efficiently, ensuring your tenant that any problems will be dealt with as quickly as possible.
Making Bad Property Choices
Securing a long-term tenancy agreement is critical, so make this process easy on yourself by making wise property investments. Many aspiring property managers make the mistake of jumping into the buy-to-let business too quickly, making bad decisions and ultimately damaging their profit margins.
As a new investor, take some time during the buying process to really analyse investments and make sure you're putting your money in the right home. It helps to spend a good chunk of time researching property for sale before signing on the dotted line. Some questions to ask yourself include:
What sort of tenant do I want and what sort of property will they be looking for?
Is the neighborhood family friendly or more suitable for young professionals?
What is the resale potential if my investment doesn't go to plan?
How quickly are rental properties being filled in the surrounding area and are there any properties that have been empty for lengthy periods of time?
Taking the time to answer these questions will help focus your energy towards properties with the most earning potential. While you may feel like you are being unproductive, your time spent assessing the market will save you a lot of money (and headaches!) down the line.