Choke Hazards of Rental Properties
By Peter Levinson
I feel investing in Real Estate truly is the best form of investing one can make. It is a tangible asset, that when bought properly and held properly, can produce residual income for years to come. I have worked with several investors who bought and held properties as a “savings” account. They held onto the property for several years with the purpose of selling it to pay for a future expense, such as paying for their kids to go to college in-full.
I have also seen it go the other way. An Investor who was not aware of the potential hazards of owning a property for rent only to see losses with their investment. Unfortunately investment properties don’t come with a list of hazards the way kids toys do. I have found these five areas have kept investors, myself included, from the true earning potential of a rental property:
- 1. Bad Buy
- 2. Repairs
- 3. Property Management
- 4. Renters
- 5. Putting off until later
1. Bad Buy
You make your money when you purchase. This is the truest statement of purchasing an investment property. The mechanics in which you purchase a property will weigh heavily on earning potential. How much you put down, interest rate if using financing, term of the loan, how much you pay for a property; are fee items most investors look at. However all of these can meet your financial numbers, and you can still choke on a bad buy. One of the hazards we look for when working with an Investor, goes with the number one rule of Real Estate: Location, Location, Location.
It may surprise you to know that “numbers” of a deal often blind Investors from looking at the location of a property. A cheap buy with minor repairs that has the potential to cash flow, but does not rent due to its location will do nothing but choke up your earrings. A couple of other areas in terms of location are:
How many other rentals are vacant in the area, what’s the competition?
Is the neighborhood flat, growing or in the decline; are people moving away?
What is around the house; train tracks in the backyard?
It is not so much “would you be willing to live there”, it is more about “who would be willing to live there?”
How quickly repairs can derail your investment is mind blowing. All the numbers can make sense, and then boom! You find out the sewer line needs replaced and you are out a few thousand dollars. Trying to save money without doing the due diligence of inspections is not being financially smart, it is playing Financial Russian Roulette. You may win 5 out of 6 times, eventually the gun will go bang.
Investing a little up front may save you a lot later. This does not mean you cannot do it yourself, just be sure to follow a checklist of items. From plumbing to electrical to the foundation. Know what you are getting into, get as many of the surprises out of the way up front.
3. Property Management
I went through several property management companies, to include trying it exclusively myself, before finding the company to take care of my investments properly. Finding is really not the right word, creating is more accurate. I needed a company that would market as well as Levinson Real Estate Team did, that handled repairs in a way that benefited me, the owner (the who, what, why and how of repair requests), and knows my rights as an owner and have systems and process is to protect me.
It is why I formed Levinson Property Management (LPM). I may be the owner, but I do not run it. I hired other people to run it. I set the expectations of what I wanted from them, and they execute it. At first it was just for my investment properties, however we have opened it up to the public. To be honest, it was formed out of a need – I knew I could not do it myself, but wanted my standards to govern how my investments where being handled. I got tired of choking on mismanagement.
When you look for a property management company find out how:
They market properties (iPhone pics or professional photos)
How they show properties, is there a strategy?
Background checks and other investigations of potential renters
Book keeping, maintenance, etc.
Does the property management company take care of your property as if it was their own personal investment? If not, find another.
This is the obvious choke hazard. Like, don’t give a baby a large plastic bag to play with. Yet, for some reason, we still need the warning because some parents still do. This is how we ensure that the potential Renter is thoroughly investigated. This goes beyond the causal background check and credit report. Dig as deep as you legally can, and find out as much as possible. With all the data, learn to read between the lines. The data will tell the story of the renter. One bad renter could cost thousands in repairs, etc.
Renting to a friend or family member? Still do the checks (its why I own, but don’t run LPM – It protects me). I lost a friend who I thought was responsible so I skipped all the checks, turns out that was big mistake. It ended up it not only costing me financially, it cost me a friendship. So now, I let family or friends know, “LPM exclusively takes care of my rentals, as long as they give you a go ahead I am good to go. They have the final say”. And then I let them apply for a rental just like everyone else.
5. Putting Off Until Later
If a repair needs to be completed, do the repair. For example, if you make a claim for a roof repair and receive money to replace the roof…replace the roof! I have seen this one too many times. An investor is selling a property that was used as a rental, at the home inspection the roof is called out, and the investor is needing to replace the roof. Not a big deal typically. However, a claim was made earlier and the investor took the money and did other things with it. And instead of making money on a sale, they are going to lose money. Or they can’t sell because they have no money to replace it. I personally worked with an investor who did this a on a few of his properties and it took him completely out of the investment game. It was like a personal Ponzi scheme that finally caught up to him and he was left broke.
The second is all the minor repairs. When you decide to sell, if the property looks “like a rental” it is going to sell like one. By that, I mean, it more than likely will not sell for fair market value if the property needs work. Don’t flip a house twice. Make the necessary repairs upfront and then maintain the property. This will also ensure you keep great renters in the house.
In closing, these are just a light touch on what I call the major choke hazards of rental properties I have personally experienced as an Investor and/or as an Agent. If you are looking to invest or for a great Property Management Company you can reach LRE or LPM at:
Levinson Real Estate Team
Levinson Property Management
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