When you first started looking into purchasing a rental property, you likely had dreams of a profitable return on your investment. After all, no one goes into business to lose money. But what if you were losing money in ways you didn’t even realize? Below are some the mistakes landlords make that can eat into their rental profits.
1. Not properly crunching your numbers
When looking to buy an investment property, it’s crucial to first calculate all your expenses in order to better understand what you can reasonably expect to get in rental profit. If you skip this step, you could wind up in trouble when you realize that your monthly rental income only covers part of your monthly rental expenses. Doing the math may sound like a pain, but it’s worth it when you consider your bottom line.
Once you know your expenses you’ll be better able to set a rent price to help make a reasonable monthly profit. In terms of profitability, one guideline to use is the 2% rule of thumb. It reasons that if your rent is 2% of the purchase price, you are more likely to generate positive cash flow. But the market drives rental prices, so you’ll have to do your research to determine what you’re able to rent for in the neighborhood. Renting for under market value risks tanking your monthly profit, but so will vacancies. If an asking price is too high, you could be left with an empty apartment for several months, and you’ll likely end up renting for whatever the going market rate is.
Do your research ahead of time. The rent prices of comparable properties will give you a good idea of how much you will be able to charge your own tenants. Check the market rate for rent in the area you’re considering by checking with property managers who handle similar properties, asking real estate agents, and looking at rental advertisements. You’ll want to revisit this step during each tenant turnover or lease renewal to be sure you’re charging appropriate rent and raising rent during renewals.
2. Choosing a bad rental location
Location is a highly influential factor as to why renters choose to rent where they do. If you’re a new investor looking for a rental property, work with a real estate agent who is familiar with the area and can point you to some of the better neighborhoods for rentals. In general, tenants look for a good location, such as areas that are close to public transportation, dining, shopping, schools and universities.
If the location of your rental is undesirable, you’ll likely struggle to find renters. This means your unit will take longer to turnover, you won’t be able to charge as much in rent. Plus, you’ll end up with a smaller pool of renters to choose from because it might take longer to find a good tenant who’s a fit for your rental. All of these factors can cause you to lose out on income, therefore, location is a key factor in choosing a successful and profitable investment property.
3. Taking too long to turnover a unit
The expenses of turning over a unit can add up quickly (mortgage, utilities, cleaning, repairs, and advertising), and the longer the unit is empty the more the expenses start to pile up. In order to be profitable as a landlord, you want to turn over the unit quickly to avoid extended vacancy periods.
On the other hand, rushing to fill a vacancy without thoroughly screening a tenant can be expensive in the long run. Evictions cost $3500 on average, so you’ll want to be sure you aren’t skipping this important step.
4. Ignoring maintenance issues
Not addressing maintenance issues quickly can lead to much bigger problems down the road. What may have started out as a small leak that goes unfixed could become a huge problem one day when the unit is flooded. In the event of a tenant turnover, you may want to take advantage of the vacant property and perform maintenance without the hassle of scheduling conflicts and bothering any current tenants. A rental unit that’s in good condition when you’re looking for a new tenant is much more likely to attract a better quality renter.
Regular property inspections can help prevent much bigger issues down the road, but you’ll also want to consider keeping the lines of communication open. A good landlord-tenant relationship is communicative and cooperative. Maintenance repairs can be inconvenient for a tenant, but if they feel that the landlord will be respectful of their time and get repairs done quickly, they’ll be more likely to report a dripping faucet (which can lead to mold in the wall) or an electrical issue (a possible fire hazard). Staying on top of maintenance also indicates to a tenant the type of condition you expect the property to be returned in. After all, if you don’t care about the property, why should they?
With all of that said, you’ll want to be efficient in completing renovations and repairs. Taking too long to get the unit ready can cause you to miss out on rental income which can add to your turnover costs. Additionally, you may consider remodeling parts of your unit to maximize profits, as most real estate experts say that updating your kitchen or bathroom is key. Some cost-saving remodeling tips involve understanding what you should repair vs. replace. Replacing inexpensive fixtures like a bathroom mirror or cabinet hardware and handles makes sense while repairing leaky faucets, cleaning carpets, and painting cabinets are generally good bets. You also don’t want to over-improve the property above the market rental rate, because it’s not likely that you will get a return on this investment.
5. Not screening rental applicants
In the interest of turning over your unit quickly, you may be tempted to skip tenant screening, but this is a mistake that can cost you much more in the long run. Tenant screening helps you better ensure you have a renter in your property that will pay their rent and be a reliable tenant.
A complete screening should include a tenant credit check, criminal background report, and eviction history. When reviewing an applicant’s reports, it is important to understand what information should concern you.
There are several warning signs to pay extra attention to when reviewing the reports.
- Prior evictions
- Payment history
- Relevant criminal convictions
- Financial stability
- Apartment-related collections
A tenant screening service such as SmartMove is quick and easy and allows you to pass on the screening fee to the applicant. A reputable tenant screening service saves you time, energy, and money. Spending a little time and effort on screening tenants now could prevent costly evictions later. It’s hard to put a price on a respectful, stress-free tenant that pays on time and takes care of the property.
In the end, the tenant screening process is the most important way you can protect your investment property. By looking at a tailored ResidentScore in combination with a full SmartMove tenant screening package, you can get an in-depth look at an applicant’s background. TransUnion studies show that the end result is a higher quality tenant with an average increased tenure of nine months. That means less money lost during tenant turnovers, and more money in your pocket.