Real estate is a great and often one of the safest ways to invest your money. Whether you’re a professional investor or simply trying to diversify your money, real estate can be very rewarding. But, like everything in life, success is not guaranteed. There are several factors that go into whether your property investment is a successful one. Here are several of the biggest reasons landlords find themselves in the negative.
Poor Research – not knowing what the local market is able to support when it comes to monthly rental payments is a sure-fire way to see your profitability decrease or disappear altogether. Putting yourself in the position of having to charge more rent than an average renter is willing to pay in the local market may result in prolonged vacancies or the inability to rent your property at all.
Overpaying – this is perhaps the main reason property investors may find themselves in the red. Overpaying for a property often results in mortgage payments that cannot be offset in the local market. If a property can rent for $2,000 per month in the local market, but your monthly payments are $2,500, you’ll be losing $500 per month! Not a sound investment, right?
Expenses – many property investors, particularly those that are new to the business, tend to underestimate their monthly and yearly expenses associated with owning an investment property, taking from their profit or in some cases completely negating it. It is vitally important to budget for both known and unknown expenses. Even if you haven’t overspent on the purchase of a property, you need to factor in expenses such as upgrades, repairs, HOA fees, taxes, etc. If your monthly profit is only $500, but if your expenses cut into or outweigh your profit, profitability is difficult to achieve.
High-Risk Tenants – obviously you need a tenant to pay rent to make money off a rental property. However not all tenants are created equal. Failure to properly vet your applicant’s financial and criminal background may result in missed rental payments and expensive evictions. Slowing down to properly screen prospective tenants, even if it means a slightly longer vacancy, will pay off greatly in the end.
Tenant Retention – vacancy is one of the biggest contributors to unprofitability. If tenants don’t renew a lease, chances are you will experience some vacancy while working to find new tenants, which will hit your bottom line. It is important to keep your tenants happy, while balancing the fact that you are not their friend, you are their landlord. Working with your tenants to find mutually beneficial solutions to problems that may arise will increase likelihood they will renew their lease.
Avoiding the Difficult – sometimes tenants forget to pay their rent or find themselves in the position that they are unable to do so. It is important as a landlord to remember that you are running a business and not a charity. Working with a tenant to collect any unpaid rents or coming up with a solution that works for both parties is important even if you don’t like conflict. In some cases, eviction may be necessary and it’s vital that you remove your personal feelings from the equation and do what is best to protect your investment.
Going It Alone – particularly if you are a new investor, property management can be difficult and frustrating. There is a reason why professional property managers exist. They have the experience, knowledge, and access to information that the average proper investor does not have. While some may look at property management fees as an avoidable expense, many find that hiring a professional property manager results in increased profitability.
Insurance – ideally, you’ll never find yourself in the position of needing insurance. But insurance is the protection you need when facing the unexpected. In other words, it’s like having an umbrella just in case it rains – usually it won’t, right? Avoiding paying for insurance can result in extreme expenses that will cut into your profit or result in even worse. To protect both yourself and your property it is important to have the coverage you need. Renter’s insurance does not cover your property and therefore it is not enough in the face of the unexpected. And don’t forget, proper insurance doesn’t just cover damage to the property itself but provides liability coverage in the event of personal injury.
Eggs in the Basket – investment 101: never put all your eggs in one basket. While the real estate market can be safer than other types of investments, nothing is guaranteed. The real estate market has its ups and downs. Diversifying your investments, whether that includes a combination of real estate and other opportunities, or the purchase of multiple properties can help increase your chances of success. You may find consulting a professional financial planner to be beneficial before entering the real estate investment market.
If you are interested in investing in the local real estate market or have any questions, we’re always here to help you out.