It may sound easy to be a landlord at first. From buying a home to making a few renovations and finally leasing it out. In reality, to successfully manage your own investment properties requires the mindset of a business professional.
So there’s a lot to think about before one can be an astute landlord. Knowing and avoiding all the common mistakes can save you lots of frustrations, and hopefully not burn a hole in your pocket.
Learn from the mistakes of others. You can’t live long enough to make them all yourself.
– Eleanor Roosevelt
The mistakes can be categorised into 4 main areas :
This is a two-part article. In this Part 1, which we shall look in the “FINANCIALS” and “LEGAL” type of mistakes. While in Part 2 later, we shall look in the “MANAGEMENT” and “MARKETING” types of mistakes.
FINANCIAL (1) NOT HAVING THE RIGHT INSURANCE
Home Protection Insurance is something that a lot of Landlords tend overlook. This is because they assumed that the insurance policy that is taken up with their home loan automatically insures the content in their property.
This is grossly misunderstood because that is actually a Fire Insurance Policy instead. Such fire insurance policies have limited coverage on the personal belonging and persons only in the case of a fire.
Should there be loss of items or personal injuries arising from other causes like theft or building collapse, fire insurance policies do not cover adequately.
Landlords will need to discuss with a professional insurance agent to take up a home content policy that includes public liability cover, in case a tenant makes a claim against them for an accident or theft they have in the property.
Landlords may also consider getting rent-guarantee insurance to cover unpaid rent if the tenant defaults on the rent. This is best for landlords who are very busy to monitor keep track of rental payments.
FINANCIAL (2) UNDERESTIMATING THE COST OF REPAIRS & MAINTENANCE
Keeping your tenants to continue to stay and pay rent, landlords must maintain the premise well.
Largely, this points to the external portions of the property because the tenant is always responsible for maintaining things within the premise.
If this was a condominium or an HDB Flat, the portion of the monthly MCST fees or Town Council fees can be taken into account to add to the rent.
On the flip side, if you start adding too much into your rent, you might price yourself out of the market.
As to how much to add, discuss this with an experienced rental agent. Factoring the right amount to quote as rent is as much a science as well as an art.
Also, set aside some money in cash you need to to make major one-time repairs (such as painting, repairing structural damage, replacing appliances, etc.)
FINANCIAL (3) OVER-STRETCHING YOURSELF FINANCIALLY
Your investment property is supposed to give you passive income. Not nagging monthly financial woe headaches.
Landlord should consider working with experienced agents. They will be able to guide landlords on how to select the right property so that the monthly mortgage will not cause them undue financial stress.
Setting aside some money right at the start of the lease is also a financial prudence. In this way, landlords can handle realistic continuing costs whenever the “unforeseen” happens. For example, the aircon compressor or water heater tank can break down at great expense or you could have a water pipe leak that needs immediate attention.
FINANCIAL (4) SPENDING ON UPGRADES THAT DON’T VALUE-ADD
While it is a good idea to keep the property well maintained to attract quality tenants, but some landlords go overboard and spend a great amount of money on home improvements that aren’t valuable to tenants.
For example, the kitchen is a good place to start with the upgrade with better appliances to attract higher-paying renters. After all, the kitchen is often considered as the center of the household. But landlords should avoid buying or installing fancy, or customized designs that appeal only to their own liking.
Improvements such as installing expensive ceiling lights that can be switched on and off just by the sound of clapping may prove to be far too extravagant. Instead, install slightly more expensive LED energy-saving ceiling lights. Not only do they not generate heat (and thus less aircon billing), the ceiling light continues to work even when one of the LED bulbs is not working.
LEGAL (5) TOO TRUSTING OR TOO ASSUMING UNTIL NOT PUTTING INTO THE CONTRACT
Some landlords almost never consider rental as a business. They “feel” that they have bought the property under their own name, so they are just collecting payment from the person “using” their property. As a result, these landlords rely on promises just because the tenant appeared to be “honest looking”.
For your own legal protection, it’s essential that your tenants sign a tenancy agreement to stay in the property and ensure that he/she understand the terms of the contract. If you find legal jargons tedious, then engage an experienced property agent to take care of this portion for you.
Should you encounter any issues or disputes problems with your tenant, the tenancy agreement is a binding legal contract that you can rely on to get the judge to make a ruling.
Just having a tenancy agreement alone is still not adequate to submit to court. Do make sure you get all the legal paperwork done right before the lease begins or else the tenancy agreement would not be accepted by the court.
Also, keep all your communications with the tenant in written form. Whatsapp, sms, emails are the best ways to support your allegations later on in court.
LEGAL (6) NEGLECTING TENANT CHECKS
It’s always exciting to finally secure a prospect as your new tenant. However, it’s not worth rushing ahead without checking your tenant’s credentials first.
Your experienced agent should be able to get the documents validated for you also.
You should be extra cautious when your tenant is “desperate” to move in quickly and offer to give the security deposit immediately. There were cases where the tenants stopped paying rent after the first month, and the landlords had a very terrible time of evicting the tenant.
Never allow yourself to feel rushed or pressured into making a potentially costly mistake.
LEGAL (8) NOT MEETING MCST OR HDB HOUSING RULES
As a landlord, you’re required to make sure the property meets the MCST or HDB Rules. Not knowing the law cannot excuse the landlord from the penalties.
For example, some HDB landlords assume that since you can keep pet dogs in the flat, they allow the tenants to keep their dogs or cats. In actual fact, there is only an approved list of breeds of dogs that one may be allowed to keep in the flat. As for cats, it’s illegal to keep cats in HDB.
If you don’t adhere to the MCST Condo or HDB Rules, your tenants may have grounds to terminate the lease prematurely without any compensation. They may potentially sue you for compensation for the undue hassle of moving due to your negligence.
LEGAL (9) NOT EVICTING SOON ENOUGH
Sometimes, tenants may not be aware that they have infringed on the MCST or HDB rules. This is still alright if they make amends after you have highlighted to them on their mistakes.
Having said this, if the “mistakes” persists or the rent defaults for one month already, landlords should take swift actions to evict the tenant as soon as possible. Not doing so 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 your experienced agent as soon as possible.
LEGAL (10) TOO AFRAID TO ENFORCE TENANCY TERMS
A good tenant means a happy landlord.
However, there are cases where tenants take advantage on the kind nature of the landlords.
If your tenancy agreement stated that there is late fees for late rent, charge it.
If your tenancy agreement stated no pets are allowed and your tenant buys a new puppy (or soooo cute), enforce the rule.
In the Asian context, sometimes when we make exceptions or waive the rules, our tenants will demand that this becomes their right on other aspects of infringement.
Your tenancy agreement should have a clause to state that your rights as a landlord can still be enforced even though you have decided to waive certain rules on a case by case basis.
LEGAL (11) POOR KNOWLEDGE OF TENANCY LAW
Another mistake landlords make is not being familiar with the landlord-tenant law. If you don’t follow the legal requirements or meet certain responsibilities, you can implicate yourself into legal problems.
Most important to understand is that a Tenancy Agreement is a contract between the landlords and the tenants. It has nothing to do with the occupiers nor the agents.
First and foremost, terms and conditions under “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 layman understanding.
For example, the landlord cannot lock up the unit just because the tenant is late for rent. Even though the tenant had failed in his obligations of the contract, it doesn’t give the landlord any rights to lock up the unit.
It is important that you work with an experienced agent to cover your interests in the Tenancy Agreement.
In contract law, there is no such thing as a “standard” Tenancy Agreement.
LEGAL (12) NOT KEEPING PROPER RECORDS OF PAPERWORK
Another common mistake that landlords make is keeping sloppy documentation.
They don’t realise that rental is like any other business – they must pay attention to the paperwork.
A proper record keeping is particularly important when dealing with the finances, especially with tracking of expenses to paying taxes. Poor tracking will just lead to more problems with tax audits and penalties.
The Tenancy Agreement and Stamp Duty are the most important pieces of paperwork.
While the Tenancy Agreement is the contract, the Stamp Duty allows the Tenancy Agreement to be admitted to the Court of Law during a dispute.
Many landlords, however, use a generic Tenancy Agreement, downloaded from the internet from “reputable” or “official sources. But such generic samples often do not take into account the unique circumstances of that property.
It’s best that landlords get an experienced agent to prepare the Tenancy Agreement to keep their best interests protected.
A prudent landlord must keep a record on each tenant that which includes Employment Passes, contact information, security deposit, etc.
LEGAL (13) NOT TAPPING ONTO THE SECURITY DEPOSIT PROPERLY
The purpose of the security deposit is to cover for any costs incurred if the tenant infringed upon the tenancy conditions. This is often referred to as specific performance.
For example, the tenant may want to terminate the lease prematurely without meeting the Diplomatic Clause conditions, so 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 need to be attended to after the tenant had handed over the unit. In a lot of tenancy agreement, they state that the landlords have up to 14 days return the security deposit to the tenants.
So, it’s in the landlords’ best interest to check the premise thoroughly during the 14 days. Once the security deposit is returned, it would virtually impossible for the landlord to request for repair compensation from the tenant.
Generally, it does not cover normal “wear and tear” such as new carpeting or a fresh coat of paint.
In some instances, landlords use the security deposit to cover defaulted rent or rent-in-lieu when the tenant wanted to terminate the lease prematurely.