Rental properties have the potential to provide a steady stream of passive income. However, if you paid a pretty penny for your rental property or if its costs are high, you might not make money or possibly even lose money. Let’s take a look at why your rental property profit might end up in the red rather than the black.
Transitioning a property from one in which a single family lived or one used for a completely different purpose will cost money. If the property requires remodeling, upgrades, repairs and structural alterations to accommodate several tenants, the startup costs might be egregiously high.
Add in the fact that the cost of buying property is increasing and the potential for a tax reassessment at a higher level after the purchase, there is even more reason for startup costs to take a bite out of the bottom line. Crunch the numbers before buying your next potential real estate investing property, get a sense of how long it will take to recoup the startup costs and proceed accordingly.
Rental Rates Trail Value and Tax Increases
Though rental rates are increasing across the nation, buying a property to rent to others is also becoming more expensive. If your property’s rental rates are not in line with the current market rate, you will own quite the valuable house or other property, yet it will not generate the revenue necessary to provide a significant amount of passive income. Adjust your property’s rental rates so that they match the value of local real estate.
Don’t hesitate to replace tenants who struggle to pay their rent in full and on time with new tenants who have the financial resources necessary to pay competitive rent. However, it’s worth noting that you should also keep rental rates fair against the current market, and always aim to keep your great tenants in contract for the long-haul. Afterall, vacancy, leasing, and make-ready costs, etc., that will occur when you lose a tenant from raising the rent too high could end up outweighing any potential increase of income you might make.
Also, every rental property owner should budget in some extra funds assuming property taxes will increase. Even if the property rate tax itself does not increase across the board, there is the potential for the town or city to reassess the property at a higher value, especially if you have added an addition or made other improvements to the property that ultimately make it that much more valuable.
Tenants are expected to keep their living space tidy yet it’s inevitable that there will be some maintenance costs for the owner that pop up throughout the year. If the maintenance costs spiral out of control, there is the potential for your rental property to be a financial net negative. Instead of outsourcing maintenance projects to whichever maintenance company is available or the cheapest, consider relying on your trusted Austin property management team to handle repair projects with their vetted and licensed vendors so you can spend your time scoping out new properties, or simply just enjoying your everyday routine.
Keep in mind that even comparably new houses can require maintenance upfront, however, choosing a new build or a property that has been inspected and shown to require minimal maintenance at the time of purchase, might make for the best rental property investment.
Loss of Leverage
It is possible that you will have a solid return on equity (ROE) in the rental property yet your cash flow might be reduced. Even if the property’s value increases, you might lose money on a month to month basis simply because rental rates are not keeping pace with inflation or the market as a whole. Consider locking tenants into yearly contracts as opposed to short-term (month-to-month or 6-month) in order to avoid costly re-letting fees and you may have the opportunity to hike rental rates in unison with market movement over time. Remember that real estate investing is a long-term game and returns fluctuate just as in any other investment market – yet incredibly less risky and proven to generate larger returns over the long run.
Choose 1836 Property Management
If you’re investing or plan to invest in the greater Austin, Tx, area, reach out to our team of professional property managers today to assist you with your real estate investing ventures. At 1836 Property Management, your success is our success.
By: Kayla Gonzales, 1836PM Marketing Manager