Updated: May 12, 2020
Avoid These Costly Landlord Mistakes That Drains Away Profit (Part 1)
It may sound easy to be a landlord. Buy a property, do some renovations and viola, ready to rent it out!
But in reality, to manage an investment property successfully requires the mindset of a businessman. After all, no one goes into a business to lose money.
Being a landlord can either be a profitable endeavour or a costly one.
But, what if you are losing money in ways you didn’t even realise? Below are some of the costly mistakes that landlords made that eat into their rental profits.
Hence, there's a lot more to consider before one can be an astute landlord. Knowing and avoiding these mistakes can save you lots of frustrations and money.
These mistakes can be categorised into 4 main areas :
To make this a more digestible and easier read for you, this article will be written in 2 parts. In Part 1 of this article, we will cover the 'Legal' and 'Financial' type of mistakes. Part 2 will cover the 'Management' and 'Marketing' type of mistakes.
1. Too trusting and not putting into the contract
2. Not conducting proper tenant checks
3. Not abiding with HDB or MCST rules
4. Not evicting tenant soon enough
5. Too afraid to enforce the terms in the contract
6. Insufficient knowledge of the tenancy law
7. Not keeping a proper record of document
8. Not tapping on the security deposit properly
1, LEGAL - TOO TRUSTING AND NOT PUTTING INTO THE CONTRACT
Some landlords almost never consider rental as a business. As a result, they rely on promises made by the tenant just because the tenant appeared to be "honest looking".
For your own legal protection, it is essential that your tenants sign a tenancy agreement to stay in the property and ensure that he /she understands the terms of the contract.
If you find legal jargons too tedious and difficult to understand, do engage an experienced agent to assist you
In the event you encounter any issues or disputes with your tenant, the tenancy agreement is a binding legal contract that you can rely on to get the the judge to make a ruling.
However, tenancy agreement alone is not adequate to submit to court. Do ensure you get all the legal paperwork verified before the lease starts, otherwise the tenancy agreement would not be accepted in court.
2. LEGAL - NOT CONDUCTING PROPER TENANT CHECKS
While it is exciting to finally secure a prospect as your new tenant, it is not worth rushing ahead without first checking your tenant's credentials. An experienced agent will be able to assist you in getting the documents verfied for you.
You should be extra cautious when the tenant seems desperate to move in quickly and offers to pay much higher than market rent. There were instances whereby tenants stop paying rent after the first month, and the landlords had a terrible time evicting the tenant.
3. LEGAL - NOT ABIDING WITH HDB OR MCST RULES
It is the landlord's responsibility to ensure that the property meets the MCST or HDB rules. Please note that claiming ignorance will not excuse the landlord from the penalties.
For example, some HDB landlords assume that since pet dogs are allowed in the flat, they agree to let the tenants keep their dogs or cats. However, only an approved list of dogs breed are allowed in the flat.
And you might be surprised that it is illegal to keep cats as pets in a HDB flat.
If such rules are not abided, your tenants may have grounds to terminate the lease prematurely without any compensation to you. They may potentially sue you for compensation for undue hassle of moving due to your negligence.
4. LEGAL - NOT EVICTING TENANT SOON ENOUGH
Sometimes, tenants may infringe the MCST or HDB rules. If the "mistakes" persists despite warning or when the tenant defaults on rent, the landlords should take swift action to pursue or evict the tenant as soon as possible.
Not taking action at the early stage can cost you hefty sums later on. If you encounter issues with your tenant and are unsure about your rights or how to proceed, contact either your lawyer or agent as soon as possible.
5. LEGAL - TOO AFRAID TO ENFORCE TERMS IN THE CONTRACT
A good landlord and tenant relationship is ideal. However, there are cases where tenants take advantage on the kind nature of the landlords.
If your tenancy agreement states that there is late fees for late rent payment, charge it.
If your tenancy agreement states that no pets are allowed and your tenant buys a new puppy, enforce the rule.
Many a time, when landlord make exceptions or waive the rules, tenants will deem that this has become their rights on other aspects of infringement.
Your tenancy agreement should have a clause stating that your rights as a landlord can still be enforced even though you have previously decided to waive certain rules on a case by case basis.
6. LEGAL - INSUFFICIENT KNOWLEDGE OF THE TENANCY LAW
Another mistake landlords make is not being familiar with the landlord-tenant law. Not following the legal requirements or meeing certain responsibilities can landlords into legal implications.
Terms and conditions under the "contract law" must be well understood. Neither the landlord nor the tenant can take things into their own hands and interpret the Tenancy Agreement according to their own understanding.
For instance, it is illegal for the landlord to lock up the unit even when the tenant defaults on the rent. Although the tenant had failed in his obligations of the contract, it does not give the landlord the rights to lock up the unit.
In contract law, there is no such thing as a "standard" Tenancy Agreement. Therefore, it is important that you work with an experienced agent to represent your interests when drafting the terms of the Tenancy Agreement.
7. LEGAL - NOT KEEPING A PROPER RECORD OF DOCUMENT
Like any other businesses, proper record of document is important when dealing with the finances, especially when tracking expenses and paying taxes.
A poor record will lead to problem with tax audits and incur penalties. A prudent landlord should also keep a record on each tenant such as Employment Passes, contact information, security deposit, etc.
While the Tenancy Agreement is the contract, the Stamp Duty allows the Tenancy Agreement to be recognised in the Court of Law during a dispute.
However, some landlords used a generic Tenancy Agreement, downloaded from the internet from "reputable" or "official sources. Such generic samples often do not take into account the unique circumstances of that property.
An experienced agent will be able to prepare the Tenancy Agreement with the landlord's interests protected.
8. LEGAL - NOT TAPPING ON THE SECURITY DEPOSIT PROPERLY
The objective of the security deposit is to make up for any costs incurred if the tenant infringed the tenancy conditions. This is referred to as specific performance.
For example, the tenant may want to terminate the lease prematurely without fulfilling the Diplomatic Clause conditions. Landlords can exercise their rights to claw back the commission paid to their agents from the security deposit.
In another instance, landlords may discover certain repairs that need to be attended to when the tenant handover the unit. It is not unusual that many tenancy agreement states that the landlords have up to 14 days to return the security deposit to the tenants.
It is essential to check the premise thoroughly during these 14 days. Once the security deposit is returned, it would be almost impossible for the landlord to request for repairs compensation from the tenant.
In some cases, landlords use the security deposit to compensate for the defaulted rent or rent-in-lieu when the tenant terminates the lease prematurely.
1. Not having the right type of insurance
2. Under-estimating the cost of repairs and maintenance
3. Over-stretching financially
4. Spending on unnecessary upgrades that do not value-add
1. FINANCIAL - NOT HAVING THE RIGHT TYPE OF INSURANCE
Home Protection Insurance is something that many Landlords tend to overlook.
Many assumed that the insurance policy that is taken up with their mortgage loan will automatically insures the content in their property.
However, that is just a Fire Insurance Policy which have limited coverage on personal belongings and persons. It is only claimable in the event of a fire.
Should there be loss of items or personal injuries arising from other causes such as theft, overflowing of water pipes, malicious acts by others or natural disasters, a fire insurance policy cannot cover adequately.
Landlords can take up a home content insurance policy that includes public liability cover. This will protect them in the event a tenant makes a claim against them for an accident or theft that happen in the property.
Landlords can also consider getting a rent-guarantee insurance to cover unpaid rent if the tenant defaults on the rent.
2. FINANCIAL - UNDER-ESTIMATING THE COST OF REPAIRS & MAINTENANCE
Maintenance and repairs of structural portion of the property falls under the obligations of the landlord whereas the tenant will be responsible for maintaining items within the premise.
So, make sure you're charging enough in rent to at least help cover a portion of maintenance and repair costs.
On the flip side, if you start adding too much into your rent, you might price yourself out of the market. Discuss with an experienced agent to decide how much to add into your rent. Factoring the right amount into the rent is as much a science as well as an art.
3. FINANCIAL - OVER-STRETCHING FINANCIALLY
Financial prudence should start right at the beginning of your investment journey. Your investment property is supposed to give you passive income. Not nagging monthly financial woe and headaches.
Landlord should work with an experienced agent who will be able to guide them on selecting the right property so that their monthly mortgage will not cause them undue financial stress.
Setting aside some money right at the start of the lease is a good way to practice financial prudence. In this way, landlords can handle "unforeseen" circumstances when it happens. For example, when aircon compressor or water heater tank break down, water pipe leakage that needs immediate attention. All these can be a great expense.
4. FINANCIAL - SPENDING ON UNNECESSARY UPGRADES THAT DO NOT VALUE-ADD
A well furnished property attracts quality tenants, however, it is not advisable to spend a great amount of money on furnishings that tenants do not consider as valuable.
For example, when selecting furnitures or appliances, landlords should avoid buying or installing fanciful or customised designs that appeal only to their own liking.
Improvements such as installing costly ceiling lights that can be switched on and off with the sound of clapping may prove to be far too extravagant.
Instead, install slightly more expensive energy saving LED ceiling lights. Your tenants and recurring tenants will appreciate the savings on their monthly utility bills.
In Part 2 of this article, I will share more about the "Management" and "Marketing" types of mistakes that landlords make. Stay tuned!