The key to getting a lucrative return on your investment property is simple: Treat it like a business! (Because it is a business!)
The number one mistake we see first-time real estate investors make is that they treat their investment property as a hobby. They act like it’s just another line item in their portfolio, and they end up running into major issues down the line.
The reality is that owning and managing an investment property can be a lot of work. It’s not as simple as buying a mutual fund—there’s a lot of red tape, legal issues, and even physical labor involved. And just like any other investment, there are inherent risks.
The key to avoiding those risks and getting the best return on your investment is to run your property like a business. Here’s what we mean by that…
The legal issues
There’s far more to managing an investment property than finding a tenant and collecting a check every month. The reality is that if you try to cut corners, it will almost certainly come back to haunt you—we’ve seen it happen more times than we can count.
The most pressing issue when you first start out will be getting legally compliant. There are a lot of legal documents you need to have in place for an investment property. If you think you can skate by without these, you’re going to be in for a rude awakening.
Just as an example, here are a few of the documents you need to have right off the bat when running an investment property in Massachusetts:
- A proper lease (written by a lawyer or a real estate professional!)
- An apartment condition statement
- A rent security deposit receipt
- A mold addendum
- A property addendum
If you don’t have these documents, you’re putting yourself at serious legal risk. It goes without saying, but the legal issues you’ll face from this will punch a massive hole in your returns (or put an end to your real estate career before it even begins).
But those are just the forms… There are many other legal issues you have to deal with when running an investment property.
You need to make sure you’re not discriminating against prospective tenants, which is actually more complicated than it might sound. You may technically be discriminating against someone without even knowing it. If you’re not aware of the laws around this, it can be a simple mistake that will lead to disaster.
You also need to be extremely careful with how you handle security deposits. There are many laws around what you can do with security deposits, where you can hold them, how much you can take out and for what, and what kind of interest you need to pay when returning the deposit to your tenants.
If you’re not 100% clear on any of these legal issues, your investment property faces serious risks.
Every business has processes. You could argue that any business is simply a collection of processes—and property management is no different. We have hundreds of systems and processes in place to help us efficiently and effectively manage all of our properties.
If you want your investment property to be successful, you need to have certain processes in place. You can’t just expect that things will “work out” on their own.
Tenant screening is a classic example. People who are new to property management will often go with their gut, picking a tenant just because they “have a good feeling” or they were referred by someone trustworthy.
There’s certainly a time and place for a gut check when screening tenants, but there are a lot of other things that need to happen first. You need to be running credit checks, establish a credit minimum, follow up with multiple references… And more importantly, you need to have a system for making sure all of that stuff happens efficiently so you can get the right person in the door quickly.
Tenant screening is just the beginning, though. You’ll need to have processes and systems for taxes, bookkeeping, rent collection, the list goes on…
If you’re expecting to simply buy an investment property and receive a check in your mailbox every month, it’s not that easy. There are a lot of things you’ll need to put in place before that happens—and even if you do get started without these processes, you’ll need to get them in place if you want to keep things rolling.
We don’t like scaring people away from investing in real estate, but we’ve seen our fair share of horror stories. If you’re interested in managing your own property, you need to make sure you cover all of your legal bases and get at least a barebones set of processes in place to make sure things are running efficiently.
If you find yourself needing help or you feel like you’re in over your head, just get in touch. This stuff is our bread and butter—as a full-service property management company, we handle everything from tenant screening to legal documents to rent collection.
But either way, the lesson here is simple. Run your property like a business and you’ll get paid like a business owner. Run it like a hobby, and you’ll regret ever investing in real estate.