Investing in real estate properties for the purpose of generating rental income is a great way to bring in extra cash, but it’s not as easy as it looks. While rental properties can be profitable, some things can get in the way of that income. If you’ve invested in rental properties, here’s a list of several things that can impede your profitability.
1. Charging below-market rent
One of the biggest sources of lost profits, next to unexpected repairs, is charging below-market rent. Maybe you rented a property to a friend and continued offering a discount to your new tenants. Or, perhaps you haven’t stayed on top of raising the rent for a while, and you’ve discovered you aren’t charging enough.
Your long-term profits will suffer each month your rent remains too low. However, you can’t just hike the rent up by hundreds of dollars if you already have a tenant. Instead, increase the rent incrementally until it’s up to the current market rate. You’ll need to do this according to your state and local laws but start the process immediately.
2. Renting to the wrong tenants
You’ll lose profitability when you rent to tenants who are disrespectful, break the lease, don’t pay rent on time, or damage the property. Unfortunately, this isn’t always possible to predict or prevent, but you can take steps to mitigate the financial impact.
Always collect a decent yet reasonable security deposit, and ask for the first and last month’s rent upfront. These two things alone will benefit you if you end up with extensive damage after a tenant moves out or if someone decides not to pay rent before moving out.
3. Trying to manage everything yourself
Although it seems cheaper to manage your properties by yourself, in the long run it can be more expensive. For example, one mistake during the eviction process can cost you your entire case, and your tenant might win the right to remain living in the property. The best solution is to hire a property management company to take over all of your landlord duties.
Here’s what you’ll miss out on by not hiring a property manager:
- Access to great deals for repairs and maintenance
- The freedom of not having to answer emergency calls at 3:00 a.m.
- Having someone else serve lease change and eviction notices
- No easy access to legal advice
- Having all your free time to yourself while someone else takes care of your tenants
The only reason to do everything yourself is if you love being a landlord. Otherwise, it’s worth the fee to hire out your responsibilities.
4. Neglecting repairs and maintenance
Some damage can become severe when left unrepaired, especially a leaky roof. Even when a leak appears to be small, the damage behind the walls can be massive. Water travels the path of least resistance, and although it appears to be only a single drop, sometimes the water has spread and soaked through the drywall and framing. Left to rot, over time, the hidden damage will be extensive.
Anytime repairs are needed, don’t hesitate to handle them fast because the consequences of letting them go can equal thousands of dollars. Also, avoid using the band-aid approach to patch issues on the surface. This never works out for the best.
5. Ignorance of landlord-tenant laws
One of the biggest obstacles to profitability is getting sued by a tenant. Just going to court will cost you money, but it will be worse if they win. You really never know when it’s going to happen, although there are indications sometimes. For instance, if you get into an argument with a tenant over a lease violation and they claim you’re violating their rights, they might be on a path to sue you.
Regardless of the situation, it’s crucial to know your landlord-tenant laws inside and out because that’s going to save you time, money, and stress if you ever get sued.
For example, if you’ve followed the law to the letter when evicting a tenant and they sue you, you can provide documentation to prove your case. However, if you aren’t aware of the law and don’t serve the eviction notice properly, you’ll likely lose your case, which might require paying a large judgment to your tenant.
Preserve your profitability
As a property investor, it’s critical to do all you can to preserve your rental profits. Start by making sure you’re charging enough for rent, and consider hiring out your tasks to a property manager. Having a professional in charge offers good protection against unexpected expenses and is worth every penny.
