7 Mistakes That Can Sink Investors' Rental Profits
Real estate has repeatedly proven to be a smart investment for those looking to generate long-term wealth. As mortgage rates continue to decline, investors have a prime opportunity to purchase a rental property to earn extra income while building equity.
However, many fail to realize the complexities involved in managing properties effectively and efficiently. That’s why property managers, who are trusted partners for investors and housing providers, must know how to prevent these seven common mistakes to protect their clients’ bottom line.
- Inadequately screening tenants. It’s important to screen potential clients thoroughly to ensure they have a good financial history and are able to pay rent on time. Failure to do so can result in lost income from unpaid rent and the costs associated with eviction. Inadequate tenant screening comes with other financial implications as well, including expensive repairs, increased insurance premiums and decreased property value. When you take the time to find high-quality tenants, your leases will be much more profitable in the long run.
- Ignoring property maintenance. Failing to address repairs and maintenance issues can lead to damage that decreases property value. Property managers can help ensure the building remains in good condition by coordinating repairs, arranging for regular cleaning and inspections, and proactively handling any other property maintenance that may be needed. Additionally, property managers can help housing providers identify opportunities for cost savings and increased profitability by finding more efficient ways to maintain the premises.
- Failing to prepare for repair costs. When owners do not budget finances correctly and do not have sufficient funds set aside to cover maintenance and repair costs, it can sink property profits. To avoid costly surprises and frustrated tenants, property managers should ensure housing providers are fully aware of the fixed and unexpected expenses that come with maintaining a rental property. To determine how much money to allocate, rental property owners can follow the 1% rule—reserving 1% of the total property value for maintenance expenses.
- Setting the wrong rental price. When rental prices are too low, housing providers will not be able to cover their expenses and earn a profit. On the other hand, setting rent prices too high can make the property difficult to rent out and lead to longer vacancy periods. To circumvent these issues, property managers must help investors research the local market and set a competitive rent price to maximize profits. Property managers can also help maintain consistent cash flow by adjusting rents as needed and ensuring that rent payments are collected on time.
- Not having adequate property insurance. Sufficient insurance coverage can protect rental properties in case of accidents, natural disasters and other losses. Insurance can cover risks including malicious or intentional damage to the property by the tenant or their guests, loss of income if a tenant defaults on rent payments, and liability for a claim against you by a tenant. Forgoing comprehensive landlord insurance can result in significant financial impacts, where owners may be forced to pay out of pocket. Property managers should encourage landlords to review their insurance coverage and consider adding policies that might make sense for their property, such as protections for rent loss, wildfires, earthquakes and flooding.
- Neglecting customer service for tenants. Good customer service is essential for property managers because it helps to ensure that tenants are satisfied with the services they are receiving, which can help to maintain good tenant-landlord relations. When tenants are happy with their property manager, they are more likely to renew their lease, which minimizes vacancies, and provide positive reviews of the property, which can help attract new tenants. Additionally, good customer service means maintenance issues are resolved quickly and efficiently, which can prevent small problems from turning into larger, costly repairs. Establishing open communication lines reduces the risk of misinformation and sets clear expectations for tenants and property managers.
- Failing to plan for vacancies. Despite the recent rise in rental property demand, property managers must plan for losses they incur from vacancies. It’s wise to set aside funds to cover the loss of rent during a vacancy as well as the cost of marketing the property to attract potential tenants. Property managers should work with landlords to make any necessary repairs or upgrades to the property to make it more appealing to prospective tenants. By helping landlords plan for vacancies, property managers can help ensure that unoccupied units are filled quickly and their income remains stable.
Property managers can provide valuable assistance to housing providers by helping them manage their rental properties responsibly to avoid common financial mistakes. With their expertise and guidance, property managers help landlords save time and effort to maximize the profitability of the property.
Article Courtesy of REALTOR magazine and Mike Bang