Welcome to the real estate world newcomer! As you think it should be an easy job to buy a property, and rent it out, and gain the money, which is more than what you must pay for the bank. Think twice before doing that!
To operate a property and make sure it will get you some revenue in return, it will require you to have a mindset of a business professional. Without any experience, you can easily trap yourself by those common mistakes.
# Mistake No.01: Don’t do a background check for your tenant
There is a type of tenant, who says a lot. They prove to you that they don’t have anything but money. They quickly sign lease contract without a lawyer. They send your deposit within a day. After 3 months of operation, they stop sending you rental money and claim that they are in business difficulties. Boom! Their problem turns into your problem.
Scanning a tenant before making any deal would help you a lot in the future run. The first thing can help you to know more about your tenant that should be the tenant information form (as you can google it in 1 second). Then you take your time to verify though information by your connections or the previous landlord.
# Mistake No.02: Be smart by choosing tenants
Tenant A has 3 locations and 5 years of experience in running a business. Tenant B has 35 and 20 years of experience. Both want to be in your center. Congratulation! It’s time for you to choose.
Tenant B agrees to take your premise for $10/sqm. However, tenant A can make an offer of $18/sqm. If you think like a normal calculation, of course, you will take the tenant B. Please do not make this mistake. As mentioned in the Mistake No.01, there is a type of tenant, they are not smart enough to do their own FS. Instead, they aggressively want to win the deal.
Before trying to find a tenant, you already made market research. You do know how much the tenant in which category that they can make an offer. Your location worth $12/sqm on your own homework. It will be impossible that tenant B can make a profit of 40% up the real market price.
# Mistake No.03: Being too positive about the vacancy
A new building or new center normally will take 18 to 24 months to reach 100% of the vacancy. Some of them are never 100% even. Doing a good financial strategy includes risk adjustment. A project should have enough money to run even you cannot find enough tenant.
Let make an example, we – the world now is struggling with coronavirus. People are hiding in their place. They refuse to go out, to social, to be in the crowd. It, somehow, affects directly to retail business. No tenant wants to expand their business in this sensitive time as they know they will lose more than make.
# Mistake No.04: Relying on a handshake
“Facta non verba” means “action speaks louder than words”. It’s a basic life lesson as I can say. In the business world, you cannot rely on words or a handshake. Having a lease contract is your needed protection and please include everything for your own shake. You can make a draft of LOO to mention all the important points before signing. Do not fail for a promise as “we can know between us” or “by our company’s reputation”. Business is business. If you run into trouble with your tenant, there will be nothing to help you but a well-written document with both signatures of two parties.
# Mistake No.05: Underestimating the cost of operation
Yes, it always happens when you are a new landlord. It’s hard to foresee all the costs that you need to pay before doing anything. Making sure to charge enough money in service fees to cover a portion of ongoing maintenance costs.
Some landlord doesn’t want to put a written list of operation in the contract as they view it as a trap. However, I think it’s their protection. If you do a good job to make a list of operations, you know exactly how much you pay. In the case of some sudden thing, you can also ask for a donation of tenants if it’s not on your list.
# Mistake No.06: Choosing a wrong contractor (or I can say: being cheap)
You pay peanut, you get monkey. There will be no such thing as being cheap but having a good in return. Building a property is one of the most important things for doing a project. If the inexperienced contractor says that it can last for 5 years, you can think the correct number should be 2. A professional business runner always works with a professional contractor.
Working with a professional can help you to save up your time. They are always good with deadline and they know what they are doing without your involvement. You can pay less than 30%. Then the problem comes to you after the warranty time. You will come up to lose more money than saving it.
# Mistake No.07: Slow in action
Anything is slow in action that can cost you a lot of money. Especially, it comes to evict your tenant. A late payment tenant is not a good tenant. There are 2 types of late payment. One is having money but doesn’t want to pay. Another is not having money. Both are dangerous.
One is having money. They always pay you back but late. However, one doesn’t have money. They will never pay you back. You have to be smart about it. You should know when it will be enough. Normally, you have a right to evict them right away if they are late for more than 2 or 3 months. That will depend on their deposit money. To be safe, do not let them stay longer than the deposit because at that point you are losing money. A lot of money.
# Mistake No.08: Be on time
It’s the thing that I always say to any of my landlords. Always being on time is a good thing and a good reputation for a developer. It also makes a good example for your tenant when it comes to their renovation time.
A new developer should have a good image. Being late with your project is not one of them.