5 Common Mistakes That Can Sink Your Rental Property Profits
As more investors enter the rental property market, newcomers should be aware of common pitfalls that can negatively impact rental property income and sink profits. Here is a list of mistakes that new and experienced real estate investors should avoid to maintain healthy profit margins for their rental properties, along with some tips on how to address them.
Fixing Common Mistakes That Real Estate Investors Make
1. Renting to Tenants Without Screening Them First
Landlords can sometimes be a little too eager to rent to the first tenant who is willing to meet their asking price and agree to their rental conditions. However, taking the time to find high-quality tenants who are less likely to damage the property or break the rules of a lease will be much more profitable in the long run.
A recent survey found that over a quarter of tenants admitted to not disclosing the presence of a pet to their landlord — and another 25% said they broke their lease terms in some way without telling. This behavior can have costly implications for landlords, including expensive repairs, increased insurance premiums, and decreased property value. Conducting thorough tenant screening that is compliant with local real estate laws will help landlords avoid this situation.
While these screening processes are crucial, independent landlords may simply be overwhelmed by the amount of work they need to put in and may lack the resources available to large investment conglomerates. But as more individual investors enter the real estate market, software for managing rental properties has become available at affordable prices or even at no cost. This software helps rental property owners who manage multiple properties create consistent pre-lease processes across all their properties. Setting up processes for tenant screening, lease agreements, and insurance requirements in a single platform can help landlords save time, stay organized, and focus on growing their portfolios.
2. Failing to Plan for Vacancies
The rising demand for rental properties in the United States can sometimes make landlords too optimistic about the stability of their rental income. Despite the high demand, rental property owners should always plan for losses they incur from vacancies. Frequent vacancies can be caused by poor tenant-landlord relationships, not responding to maintenance requests, or ineffective marketing of the rental property. Regardless of the reason for it, landlords should focus on minimizing tenant turnover to keep profits up.
Even with consistent rental income, property owners should keep an eye on the health of their real estate investments and evaluate whether they are meeting their earning potential. Spreadsheets and other manual accounting tools make it challenging to track income and expenses for multiple units and tenants. By using financial software designed for landlords, you can easily view rent payment status, expenses, and the overall financial performance of your entire rental property portfolio.
3. Neglecting Customer Service for Tenants
For many landlords, good customer service can seem like a value they should provide only to their best-behaved or most loyal tenants. However, inconsistent service across multiple rental properties will lead to frustrated renters and tenant turnover. Landlords that provide consistently excellent customer service — such as quickly responding to requests, taking care of maintenance issues, and giving tenants the privacy they expect — can expect more regular renewals, better tenant behavior, and improved reviews.
Investors can provide consistent customer service by establishing open communication lines between tenants and landlords. This communication should then be documented and stored in a consolidated database that each stakeholder can access easily. This reduces the risk of misinformation and sets clear expectations for landlords and tenants.
4. Keeping Incomplete Documentation
Drafting, securing, and enforcing contracts are essential tenets of any business — and rental properties are no different. Failing to keep proper documentation of security deposit usage, landlord insurance, lease addendums for pets, or other items can result in complicated and costly legal issues. Written agreements and a system for organizing them allow landlords to set expectations with tenants and enforce rules throughout their lease period. These written agreements must be accessible to each stakeholder at all times.
5. Underestimating Maintenance and Repair Costs
Most landlords know they need to budget for maintenance and repair costs for their rental properties. However, these expenses can vary wildly across property types and leases. Additionally, some lease agreements state that tenants are responsible for some repairs for damage directly caused by their negligence, but there can be confusion: a recent survey revealed that over 78% of tenants expect their landlords to pay for repairs. Landlords should be fully aware of the fixed and unexpected expenses that come with maintaining a rental property to avoid costly surprises and frustrated tenants.
All rental property owners have to deal with plenty of financial documentation and this can be overwhelming for landlords who want to keep an eye on their expenses. Technology tools built specifically for landlords and tenants can make it easy to store and retrieve these documents when they are needed. A platform that is also accessible to renters can help landlords provide tenants with transparency and visibility in every transaction.
Setting Your Real Estate Investment Up for Success
As rental property demand continues to rise, investors have an opportunity to build and maintain a real estate portfolio that is profitable in the short and long term. However, your investment return can be undermined by mistakes such as skipping tenant screening, incomplete financial analysis, or lack of organization. Landlords who can successfully establish effective and efficient financial and administrative processes will lay the foundation for a profitable rental business experience.
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About the Author
Mike Bang is Head of Growth at Azibo, the one-stop-shop financial services platform for rental properties, providing a world-class platform for rent collection, banking, lending, insurance, and more.