Mistakes made when living off of your rental income. We all make them, but we’re going to focus on mistakes that are made by those who are investing in rentals and are living off your rental income.
1. Quitting your job too fast
I always see people make is quitting your job too fast. Why? Because if you are trying to expand your real estate portfolio, if you’re trying to just simply gain more equity faster and faster, you’re eliminating that option by just simply quitting your job, because that means you’re only going to be living off your rental income and nothing else.
You’re not going to have the ability to expand any further. You could, but you’re going to have to get more creative, but why would you want to eliminate that opportunity? Why would you want to eliminate that extra option that you have? Because in the end, it’s all about the options.
2. They don’t reinvest their money
You can reinvest when you have the money, but not when you’re trying to build your portfolio and increase your net worth. Credit cards, I utilize credit cards in my closing a lot, and there are so many ways you can milk it and get cash out of it.
Let’s say, for example, you collect, let’s just say $1,500 off of rent on a rental property that you have, but let’s say the mortgage payment is just simply $900 on that property that you own. What you do is that whatever amount that is extra right there, you wind up spending it. You just simply don’t pay it back towards this amount and accumulate more equity. By accumulating more equity what you can do, you can expand even faster because you can either do a HELOC, you can even do a cash-out refi, and then just use that money and buy another property or two.
3. Paying the minimum
Which in essence, it’s very similar to number two right here.
When you’re paying the minimum, that means you are paying just whatever it is the minimum amount towards principal and a lot of it towards interest, which means you’re spending more money in the long run because you are contributing very little money towards the pay down of your mortgage and you’re in essence paying a lot more in interest. That’s another common mistake that you make.
What happens when you over-renovate a property? Well, you have to renovate depending on the demands. Some areas will demand the nice countertop kitchen, the nice stainless steel appliances, but there are other areas like the working-class neighborhood and stuff, they just simply contend with what they have.
That is not to say that you’re going to give them a crappy house or anything like that. It’s just simply saying, as long as the house is in good condition, they don’t need anything overly fancy as long as the kitchen is functional, as long as everything they need, it’s actually in that one house that you’ve provided to them. There’s no need to over renovate because that’s just simply going to cost you a lot more money.
One of the common mistakes with over-renovating is that a lot of us tend to think, “Well, I don’t picture myself living in this property,” and we have to remove the I out of the equation because the fact that you wouldn’t live in a property does not necessarily mean other people are not going to live in there. For example, I live in New York City, I am a big city girl. I don’t mind having a smaller apartment, but I love the action.
I love running around. I love having the ability to just simply hop on the subway and go pretty much everywhere I want to go. Now, my girlfriends who live in Long Island, they love the suburbs. They love having to hop on a car and drive 30 minutes to the next supermarket available for them, and not in a million years they will ever live in a tiny studio that I live in because it makes them feel claustrophobic, bad, whatever. They can’t stand the noise.
They think the city is dirty. In a million years I will trade my near city, tiny apartment for one of those big houses in Long Island because to me that’s just boring. It’s suburban life. It’s just not my lifestyle. I’m not saying it’s a bad thing. It’s just not the right lifestyle for me and vice versa for my girlfriends. My lifestyle is not the right lifestyle for them. That goes in essence back to this. Do not over-renovate, just give what the market demands, give exactly what is needed so that way everyone is content, and also you are effectively managing your money.
5. Not fixing anything
What happens when you don’t fix anything? Well, you get very unhappy tenants. They will probably just want to delay the rent because you as a landlord are not fulfilling your duty of taking care of a property, of providing a safe and sound property for them to live in.
Why would you ever want to do that? Not to say that you’re running the risk of getting fined because your tenant can just simply call the city and report you for not being a good landlord, for not providing a safe area. That in essence, the couple of hundred dollars that you were trying to save, you’ll wind up spending perhaps even thousands of dollars depending on the size of that fine that you wind up getting from the city.
6. Fall into unconscious bias
Unconscious bias and I’m probably butchering the word unconscious, but you get the gist of it. What exactly does that mean? You could be discriminating towards certain groups, call it religion, call it sexual orientation, call it gender, call it to age. You have to be very careful with that because for whatever reason if you wind up making others feel disrespected, they could report you and at the same time, you can get fined as well for violating anti-discriminatory laws. Now, ignorance is not an excuse. If you are unaware of it, too bad, you need to inform yourself.
7. Not having an LLC
No LLCs. Why?
Because when you run your rental properties as a business, you get the perks of having all of those benefits as well. You get a tax deduction, you get larger credit lines, you get access to more capital to continue to invest your money and also you save more money at the same time. It sounds counterintuitive because you will think, “Well, if I have an LLC, that means I need to maintain it. I need to pay some fees.”
Guess what? All of that money that you’re paying towards fixing property and then interest that you were paying towards the mortgage, all of that, you can deduct those from your LLC because they are now a business expense. You’re having a mortgage as a result of a business. Your rentals are your business. When you treat everything like it is a business, then you get all the benefits from running an actual business. Consider those.
This is a big plus and at the same time, having an LLC protects you from liability because as you know, we are in the country of litigation. We are in the land of lawsuits. Everybody wants to sue everybody to just get access to easy money, free money and why would you ever want to risk your properties when you worked so hard to earn them in the first place? Keep LLCs in mind.
8. Not having a property manager
No property manager. Why? Well, for those who are actually self-managing properties, I understand when you’re trying to get started because you’re trying to be cost-efficient and stuff like that.
Think of it this way, when you grow more and more and you have a much larger portfolio guess what’s going to happen? You are going to have to invest a lot of your time because now you’re going to have to walk from one property to another, just making sure everyone is getting what they need. You have to every month go and collect rent. Imagine if out of 10 apartments that you have 5 happened to lose their keys.
Now you have to make sure you go through five properties and then if something breaks, then you want to fix it yourself. Maybe you’re horrible at fixing a sink or maybe you’re horrible at fixing certain things. You were trying to do everything yourself. It’s not a good thing because one, you could be fixing it wrong, and then it ends up costing you more money. That’s one. Then two, you’re taking away good time from you that you could be utilizing that time to further expand your real estate portfolio or perhaps spending it with the people that you care about the most.
What is it that you’re getting out of it? Because the most a property manager can charge you is 10%, sometimes even 12% depending on the area. If you come to think of it, yes, it might be a lot in the beginning, but it will free up so much time. To me, at least, it is a no-brainer. It’s something that it’s going to allow me to create more videos like this is. It’s going to allow me to do more research, to travel.
In essence, I think you will want to do the same. Not necessarily travel, but then you have other things that you enjoy doing more than just going over each one of your properties, just to save that 10%. Definitely something to keep in mind.
9. Don’t report their rental income
I know that a lot of people want to give the impression that, “Hey, at the end of the year, I want to get the most out of my income tax.”
Guess what’s going to happen when you don’t report your rental income? You are affecting, you’re impacting your annual income in your income taxes. Guess what’s going to happen every time you go and apply for a mortgage, they’re not going to lend you the amount that you desire. Let’s say– We’re just going to use this space right here. That before you reported your rental income, your annual was $15,000 a year.
That was your annual revenue, your annual income, whatever you want to call it. Let’s say after you report, your income tax winds up being, let’s say, I don’t know. I’m just going to throw a number out there, $70,000. You might probably be thinking, “Oh, my. I’m going to wind up spending more in taxes right here.” Guess what’s going to happen when you go to the bank? The bank on average will borrow you maybe three to four times your annual income.
That means the most you’re going to get out of a mortgage is $200,000. You multiply four times five, that’s 200,000. Assuming your credit is perfect, you have everything, great. Now, going to $70,000, assuming you are reporting your rental income. Now, four times $70,000 will be $280,000.
Which amount would you prefer to get in funding to invest in real estate? Do you prefer to get just $200,000 right here or you prefer to get the $280,000 up here? It is a no-brainer, I know. It seems counter-intuitive, one more time, because we tend to think, “We want to save some money here.” Remember, Uncle Sam likes to reward people who behave the right way, who do things the right way, who likes to do business, who likes to create jobs for the economy and bring up the economy and help out everyone in the community.
By creating more jobs, giving more jobs to the people who create your LLCs, to your property manager, you are getting more money in return, and you’re also getting discounts in your taxes.
RESOURCES & LINKS MENTIONED IN THIS EPISODE:
– Prevent rental discrimination: https://www.zillow.com/rental-manager/resources/fair-housing-guide/
VIDEOS COMPLEMENTING THIS ONE:
– How To Properly Manage Your Properties: https://youtu.be/nJE8pd9CXPM
– HELOC vs Cash Out Refi: https://youtu.be/1KqBH2gYk_E
– Benefits of the US Tax Code: https://youtu.be/lhmGkfg_t0U
PLAYLIST COMPLEMENTING THIS ONE:
– Guide to Cash Out Refi/HELOC: https://www.youtube.com/watch?v=Zjm0C7KfhUA&list=PLbg0ENts-e2trQMu4N7Xt_t0CWzRYeX6v
– Going From 0 to 24 Properties Playlist: https://www.youtube.com/watch?v=Z2yubZzAIFI&list=PLbg0ENts-e2uUWnT-xF_fOk0ygj-pXXHN
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