5 Income Property Profit Killers
Getting into real estate sounds sexy, it’s fun to talk about socially and there’s no shortage of success stories to fuel your dreams of early retirement and a life of riches. What many fail to realize is that real estate is a hands on business that requires hard work despite the fact that you are trying to create passive income. Here are 5 profit killers to watch out for.
1. Overpaying
Overpaying is easy to do especially in the current market (2013) where buyer demand is outpacing supply by many times. You have to pay to play so to avoid truly overpaying, go in with a game plan. (1)Establish a clear exit strategy, (2) set a max buy price based on your exit strategy and (3) find out what the seller’s expectations are and how many buyers you might be up against. Setting a max buy price based on your anticipated exist strategy is essential. You can read more about each point in a previous posting.
2. Underestimate expenses
Learn the basics for underwriting income property before you make an offer and don’t squeeze your numbers to make the deal work. It’s better to over-estimate your costs for repairs, supplies and tenant turn-over. The money to cover these and other expenses is going to come from somewhere. You get to decide if it is going to be your operating budget or your personal checking account. There’s more than one way to lose money. If your income covers all your expenses but you are self managing, you are losing money unless you don’t value your time. Goal #1 with income property is to make sure you get paid. View a simple pro forma spreadsheet for analyzing the profitability of 1-6 unit properties.
3. Ignore property maintenance
Little problems turn into big problems if they don’t get addressed, all the time, every time. Handling deferred maintenance issues should be a priority. If you have a toilet leaking, a wax ring is less than $5. Waiting for the tenant below to tell you water is leaking through her bathroom ceiling costs more. Stay up on issues with the electric, plumbing, heating/cooling, windows, roof, etc. These are all things that can be patched or fixed many times before replacement is required. One important caveat, most tenants won’t tell you about small issues until they become big issues. Make it a priority to go through the units with some regularity.
4. Not maximizing income
A common mistake for new landlords and those with experience is to leave money on the table when it comes to rent. What you charge for rent and the reasons behind it are your business. I’m only going to say that gainfully employed people pay up for quality apartments that are safe, comfortable and reliable. The rental market has exploded since 2007 and rents are currently at all time highs (2013). Real estate is cyclical and we are in the middle of a solid cycle for maximizing rental income. It’s a simple supply and demand issue. Household formation is at multiyear highs in the US and many experts feel that lending restrictions coupled with the ongoing fear of buying will help to keep a large percentage of the population in short term (rental) housing for years to come.
5. Poor tenant experience/management
Are you giving your tenants a reason to move out? If so, this is costing you money. Think leasing fees, advertising costs, your time to show the apartment and interview tenants, painting, cleaning, and replacing fixtures.
Your tenants are your customers. Most professionals do their best to retain their customers. Property management is no different. Maintain a good relationship with your tenants and they will want to pay rent on time. Small things add up in terms of tenant experience and it can be relatively easy for you create a positive experience by responding quickly to maintenance requests, keeping the common areas clean and updated and ensuring the property is well lighted, safe and secure. If you have bad apple tenants who make living in your building a terrible experience for your good tenants, do your best to alleviate the problem. Including a community policy addendum with your lease is a great way to set the ground rules for leasing in your buildings.
Brent Hall is a Broker Associate with Jameson Sotheby's International Realty, Chicago. Contact Brent Hall to discuss buying or selling real estate in Chicago.