How To Decrease The Risk Of Losing Money On A Rental Property
By Paul Esajian on January 5, 2015
Having rental properties in your portfolio can be a great way to make money, but it can also be the source of great frustration if you are not careful. Contrary to popular belief, not every rental property will be a money maker. Not only do you need to find the right property, you need do the right work and take care of it for the property to be a success. The minute you let your guard down and think you have everything figured out, you will begin to lose money.
The single biggest area where investors get themselves in trouble on rental properties is with the numbers. Having a property that rents for a large amount does not automatically mean it will produce good cash flow. With every property you buy, you need to look at the whole picture and everything involved. In addition to basic numbers for the mortgage, taxes, insurance and utilities, you need to look at comparable market rents, maintenance and vacancy factor. Instead of assuming that everything will go as it has or how you planned, you should consider the worst case scenario. If there is still money to be made when the market takes a slight turn or expenses increase, you know you have a good rental property. However, if all it takes is the smallest change for you to lose money, you should reevaluate the property.
Rental property owners also get in trouble in thinking that they can increase their rental price based on the work they have done. Rental properties and buy and sell rehabs are different in that buyers will pay a premium for not having to do work when they move in. Renters certainly like the updates and improvements but will not pay considerably more than what the market dictates. The work will increase your chances of consistently finding tenants but if you are doing it to bump the rent up 20-30% monthly you will be disappointed with the results. Any work should be done with an eye towards the long term value of the property and not for a short increase in rent. In most cases you can get by with putting in upgrades in line with the market and nothing else. Anything more that is spent could be viewed as wasting money that is better spent in other areas of your business.
Having a great rental property is only as good as the tenants you put in it. If you are not diligent with your tenant screening you open the door for disaster. As much as we would like to think that all you need to do is walk to your mailbox every month and collect a check this is more fantasy than fiction. There are plenty of great tenants but all it takes is one bad one to set your business back. Anyone that has ever gone through an eviction knows just how time consuming and money draining this is. While you can never guarantee a good tenant if you take the time to review your application and follow up you increase your chances. This process is often rushed or even ignored with new landlords and they assume that all tenants will be good ones. As much time, or more, needs to be spent in screening new tenants as with any other part of the process.
If you own a rental property you need to treat it like the asset it is. This means performing seasonal maintenance and making timely repairs when needed. At a minimum you need to check the furnace, oil tank, roof and central air unit every year. What you spend on keeping these functioning efficiently you will save by increasing the useful life of these items. Many landlords view this as spending money in areas that doesn’t really need to but the reality is this is where you should be spending money. The same is the case with unexpected repairs. You can put a band aid on most items but all this is doing is making the problem worse down the road. Things will happen on every property and with every tenant. It is up to you as the landlord to tackle these head on as soon as they come. You need to have reserves allocated specifically for this event and be ready to act as soon as possible. The longer you put off doing work that is needed that higher the chance that you will lose money in the near future.
The final area where landlords lose money is by not hiring an accountant to handle the books. Regardless if you have one property or a dozen a good accountant will find ways to save you money throughout the year and especially at tax time. A couple of dollars here and there can add up to a large amount of money over the course of twelve months. By having the structure and guidance of a good accountant you can protect your investment and feel confident you are not throwing money out the window.
Owning rental property is a great way to bolster your portfolio and accumulate wealth. It can also end up costing you money if you are not careful. It is usually the little things that can get you in trouble if you don’t address them immediately. As good as owning rental property can be if you not careful it could quickly turn into a disaster.