Investment properties and rental properties seem like easy ways to make money. In most cases, you’ll be able to charge more in rent than you’ll pay in a monthly mortgage payment, and if all goes well, you can pocket the difference as free income every month. Plus, your property is likely to appreciate in value, yielding an even bigger profit when you go to sell it.
However, being a landlord isn’t as simple or as easily profitable as it seems on the surface. In fact, you could end up losing money on your investment properties if you aren’t careful.
Potential Issues
How could you lose money on a property? Any of these nine ways could do it:
- You chose a poor neighborhood. The value of your property will be intrinsically tied to the neighborhood in which it resides. That will affect both the price you originally pay for it and the price you get for it when it’s time to sell. Accordingly, if you make a bad choice with the neighborhood, it could cost you money. For example, if you choose a neighborhood with high prices that ends up on a downward slope, your home value could disproportionately decrease over time. It’s true that most homes end up appreciating in value, but some neighborhoods end up degrading due to changes in crime, school systems, or available jobs.
- You didn’t charge enough rent. Obviously, the rent you charge will represent your income for a given property. If you don’t charge enough rent to cover both your monthly mortgage payments and random occasional expenses that arise, you aren’t going to make a profit. The trouble is, you can’t just raise rent prices and call it a day—you also have to keep rent low enough to stay competitive in a given market. That’s why it’s important to research rent prices before you purchase a property.
- You didn’t account for the cost of repairs. Many new landlords end up neglecting the cost of maintenance and repairs in their budgets. As a general rule, homeowners should plan to pay about one percent of their home’s value in annual expenses, so a home worth $200,000 would cost about $2,000 in yearly repairs and maintenance. This is a significant expense that could slowly eat away at the value of your investment (and your income)—so make sure to prepare for it adequately.
- You paid too much. It’s possible that you picked a good home in a good neighborhood, but the price you pay doesn’t necessarily equal the value of the home. If the property hasn’t been appraised correctly, or if it’s in an area with overvalued properties, you could end up paying far more for a property than it’s worth. In some cases, it may be worth making the purchase (for example, you may suspect home prices to rise further in the near future), but you need to know what you’re doing.
- You chose poor tenants. Tenant screening is one of the most important processes for new landlords to perfect. Your choice in tenants will affect whether your rent is paid on time, whether it’s paid consistently, how long a tenant occupies your property, and how many issues that tenant causes. Failing to background check your tenants could result in non-payers, destructive tenants, or tenants who make your life difficult and expensive with legal battles. Screen your tenants thoroughly.
- You had too many vacancies. A vacant property means you’ll be paying your monthly fees without collecting any revenue to offset them. The longer your property remains vacant, the more money you’ll stand to lose. There are many reasons for a long-standing vacancy; a lack of advertising, a lack of demand, uncompetitive rent prices, or even a general lack of appeal. You’ll need to account for all these factors to keep your property occupied for as long as possible.
- You bought a fixer-upper but relied on bad judgment. It seems simple to buy a fixer-upper, make some repairs, and sell the home for more than you paid for it, but flipping houses can end up costing you a lot of money. Before you attempt this strategy, make sure you know what you’re doing and be thorough in your estimations.
- Your property wasn’t safe (or you weren’t insured). As a landlord, you’ll be responsible for ensuring your tenants live in a safe environment. If a tenant is injured due to a repair that wasn’t made or a defect with the property, you could be held legally responsible. Make sure you have a solid insurance policy, and correct any property safety issues immediately.
- You forgot to account for taxes. The cost of taxes may interfere with your cost and revenue projections. Don’t forget to account for both property taxes and income taxes on the rental revenue you receive.
How to Mitigate Your Risk
Fortunately, there are a few simple things you can do to mitigate your risk in all of these areas simultaneously:
- Know what you’re getting into. Do all your research in advance, and be as thorough as possible. If you aren’t familiar with something, find someone who is.
- Estimate conservatively. When calculating things like home value, rent, and potential repairs, estimate as conservatively as possible. It’s better to err on the side of caution.
- Be proactive. If you know a repair needs to be made, make it as soon as you can. Start lining up new tenants as your old ones are moving out. The more proactive you are, the better.
- Seek expert opinions. Work with other property investors and niche experts (such as repairmen) to increase your knowledge and make better decisions.
If you find yourself overwhelmed by the responsibilities of being a landlord, consider enlisting property management services to help you bear the burden. It may cost a bit of extra money upfront, but you’ll be able to manage your properties hands-free, and can still make a consistent profit (if you avoid the issue listed above). Contact Green Residential today!
Michael is Green Residential’s Vice President. He helps to keep the team organized and running smoothly. Prior to joining Green Residential, he spent 12 years working at Cadence Bank in the mortgage loan servicing department, where he specialized in loan audits, modifications, and bankruptcy-related issues for the mortgage portfolio.
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