Here are some pitfalls to avoid, and problems to deal with in owning rental properties.
1. Bad Tenants
The number one, biggest single problem in owning rental properties is bad tenants. Your investment is only as sound as the willingness and ability of your tenants to pay rent. If you don’t pay close attention to this, this is where you will make your biggest mistakes in owning rental property. Every bad tenant who defaults on their rent costs you net income because the expenses go on regardless.
2. High Vacancy Rates
High vacancy rates or seasonal fluctuations can really hurt your income. They can even cause you to lose the building. If you’ve done all the research and analysis you won’t get caught. But you must be careful.
A good friend of mine, an experienced real estate investor, visited Phoenix from the Northeast one winter. He was charmed by the climate and decided to purchase an apartment building that seemed to be very reasonably priced based on his experience. Then the spring came.
In March and April, 70% of the tenants moved out and back to the cold climates. When he came back, he was astounded to find that he was losing an enormous amount of money.
He discovered that all the apartments had been rented on six-month leases to people from the north that came down to Phoenix in the wintertime. Because of the seasonal fluctuation, he suddenly had an empty apartment building.
And he wasn’t the only one. A lot of property owners were stuck with empty apartment buildings. He almost lost his entire investment.
3. Poor Management
Unless you are going to live in or personally manage your apartment building, you will eventually need to hire a manager. This person will be responsible for renting out your apartments, collecting and depositing rents, maintaining the property, and dealing with the needs and complaints of the tenants.
Your choice of a manager is critical to the success of your investment. Interview carefully, check references, monitor activities, and stay on top of the business.
A good manager can be a blessing. A poor manager can cost you a fortune. Leave nothing to chance.
Commercial Real Estate
Commercial real estate and real estate development follow along the same lines of analysis.
Just remember that you are buying the long-term future earning power of a piece of property and you must analyze each piece of property carefully by asking these questions:
– First, how much does it cost me? – Second, how much do I get back? – Third, when will I get my return on my money? – Fourth, how certain is it that this return will materialize?
Here is the final question: What else can I do with the same money?
The key to long terms success in real estate is net, unencumbered, free cash flow from the property over time. Your goal is to build a real estate portfolio that gives you a steady flow of income, tax benefits, increased equity and value appreciation for the indefinite future.
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