Today we’re talking about the top three costs of owning a rental property.
After several years of plugging away at BiggerPockets, I have come to realize that in everything you are looking at doing, you must focus on people. This blog article won’t be about the nitty-gritty stuff that could cost you money on a rental property; it’s going to be about the people component.
Ready to invest in rental property? BiggerPockets’s guide to the buy and hold strategy will teach you how to analyze rental markets, budget for your investment, choose the best property, and finance your purchase. Ready to start investing in rental property? Here’s how.
3 Hidden Costs That Can Tank Rental Property Profits
1. Working With People You Can’t Trust
These people have to have your best interest at heart. They have to be of the mindset to plant the seed now and reap the harvest later. Do NOT work with people who want your money on the spot.
Real estate is long-term. It is a marriage, not a one-night stand. In order for you to have success in owning rental properties, you have to have the right people in place to work with you for an extended period of time.
Surround yourself with these key people:
- A good real estate agent to locate properties in good areas.
- Property management focused on keeping tenants staying and paying. They must have a genuine interest in keeping tenants in your rentals paying rent. Your property management cannot be willing to immediately evict tenants so that they can charge you one and a half months’ rent for new tenant turnover.
- A maintenance company you can trust. Establish relationships with one or two maintenance guys in a particular area who aren’t going to up-charge you for things that don’t need to be done.
- A good attorney in case of trouble. You never know what could happen with your rental portfolio. You must have good legal advice.
- A good accountant to help you structure your real estate endeavors so you’re not paying ridiculous amounts in taxes and so you can offset as much as you can via expenses.
2. Maintenance Issues
Make sure the roof and furnace of the property you are buying have at least 15 years left in them. Most furnaces last 20 to 30 years. Make sure you get your trusted maintenance guy or a contractor to check them out.
The hot water heater should most likely be replaced. Definitely replace it if the property has been sitting vacant for six to 10 months.
I strongly suggest that all the plumbing and electrical be redone (especially if you are buying distressed or vacant homes that have been sitting vacant for a couple years).
If you are replacing all of these things, make sure you are really buying the property at a great price. Make sure the numbers all make sense, and you’re not spending too much on rehab so you aren’t going over budget.
3. Bad Tenants
Don’t hate your tenants! You have to think of them as business partners. You need to do everything in your power to keep them staying and paying. Remember, your paying tenants allow you to have cash flow, live life on your terms, and be financially free. So, if that means getting details about their anniversary and sending them a little gift or providing a Christmas gift card, do whatever it takes to keep them happy!
Related: Tenant Screening: The Ultimate Guide
Be prompt at communicating when issues arise. Prompt communication gives people peace of mind. Even if you can’t address the issue right away, they know you are thinking about them.
When screening prospective tenants:
- Make sure a background check is part of your tenant screening process. You need to know if there is any criminal history. If there are minor issues, try to work with the prospective tenant if you feel comfortable.
- If there is an eviction history, that is a no-go. If there is any kind of eviction on the record, the chances of us proceeding are maybe 10 percent. There have been some rare exceptions where evictions were wrongly reported. We researched them, considered the facts, and ultimately rented to the prospective tenants.
- Verify income. You will want your tenants to have three times the monthly rent to justify renting the property and to have enough of a buffer to afford to pay the rent.
As I always say, “Business is easy. People make it difficult.” Consider the people factor. You have to focus on the people in whatever you do.
Try to always underestimate your income and overestimate your expenses. Looking at the worst-case scenario will help you mitigate the risk and succeed!
What other costs would you add to this list?
Leave me a comment below!