3 Hidden Costs That Can Tank Rental Property Profits

by | BiggerPockets.com


Today we’re talking about the top three costs of owning a rental property.

After four years of plugging away at BiggerPockets, I have come to realize that in everything you are looking at doing, you must focus on people. Today’s 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.

Related:How to Hire Amazing Team Members for Every Real Estate Process — From Finding Deals to Renting Them Out

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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 a long term is a marriage; not a one-night stand. In order for you to have success 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 6 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 a 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 and 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!

About Author

Engelo Rumora

Engelo Rumora “The Real Estate Dingo" is a successful property investor, motivational speaker and serial entrepreneur that quit school at the age of 14 and played professional soccer at 18. He is also a soon to be published author along with becoming a TV personality in his very own real estate house flipping show. To find out more go to engelorumora.com . Engelo Rumora has been involved in over 400 real estate deals and founded five businesses in Ohio. The most successful is Ohio Cashflow, a company that specializes in providing turnkey properties in several Ohio markets. The newest venture is List’n Sell Realty, a real estate brokerage based in Toledo, Ohio and soon to be known as the #1 discount broker in the country.

16 Comments

  1. Charles Jones

    Thanks for the post @Engelo Rumora. I am in the knowledge gathering phase before making my first non-primary residence investment. I am considering moving forward with 2 business partners. What is the most appropriate time to discuss our ideas with an attorney and/or CPA? At this time, we are not committed to the partnership idea, but trying to give the concept strong consideration.

    Thanks!

    • Engelo Rumora

      Hi Charles,

      Thanks for your comment.

      I would not advise investing with partner.

      “Business is easy, people make it difficult”

      I went down the “partner” route when I first started and always ended up pulling the shorter straw and having a sour taste afterwards.

      Be patient and start your own biz where you call the shots and make the rules.

      Just my opinion

      Thanks again and much success

  2. Christopher Smith

    Hello Engelo

    I have a rental coming up on 20 years (my first property) and I’ve been told it will need to be re-shingled within a couple of years. My prop mgr knows a couple of contractors and will make recommendations and get estimates. Do you have any suggestions or simply any basic things to consider?

    Chris

  3. For lower end neighborhood ($425/mo.) properties 3X rent is not enough. Figure budget for what your personal minimum expenditures for living in that area and add to rent. Around here it cost at least $1,000/mo. to live frugally in addition to housing. That’s for one adult. People with low end jobs have to get working roomates. They seldom realize that.

  4. Dmitriy Fomichenko

    Excellent advice, especially on considering your tenants as your customers. Further, choosing the right contractor or property inspector could actually save you thousands of dollars. They can identify potential problems upfront, hence saving you the cost of repair or replacement after the purchase.

  5. Engelo Rumora

    Hi Domenick,

    Thanks for your comment.

    Why would they think they are paying too much if you send them a gift card around Xmas?

    That doesn’t make sense in my opinion.

    Most of our tenants are delighted with a gift card, especially when it’s Xmax time.

    Thanks again 🙂

  6. Alden Simpson

    That is great advice, Engelo. Ive delt with so many landlords that are impossible. They either are difficult to get a hold of, or are irritated when a repair needs to be done in the rental. I currently have rentals and I love your advice about giving cards to keep a relationship personable and treat the tenants well.

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