In the world of real estate investing, even the most well thought out plans need revision at times. In dealing with rental properties, you need to be able to adapt within a moment’s notice. No investor ever thinks their numbers will be off or things will go south, but it happens to even the sharpest individuals. Often times it is what you do and the decisions you make during this critical time that makes all the difference. If you don’t take immediate action as soon as you realize you have a problem, you will eventually make it much worse. Do yourself a favor and prepare for the unexpected. The last thing you want is for your own asset to get the best of you. Your property should be making you money, not losing it.
There are many reasons for a rental property to turn bad once you take ownership. The property could need more time, work and attention than you thought, or there could be a change in property values. Property taxes and expenses could be higher than you anticipated or your rents lower than you budgeted for. It sounds obvious enough, but the first thing you need to do is identify the problem. Instead of avoiding it or dancing around the situation, get to the bottom of exactly what is causing the problem in the first place. Some things, such as property taxes or expenses, will be out of your control, but others can be dealt with and corrected. If you don’t know what is making you sour on the property, you will not know how to correct it.
Most of the time, a bad rental property is based on two things: numbers and tenants. Let’s deal with the numbers part first. You probably spend days, if not weeks, running numbers and finding out every expense associated with the property before you make an offer. After you have owned the property for a year or two, you may no longer have a firm grasp on things or they may have changed dramatically. Before you write the property off, you need to dive into the numbers and go through all the expenses you are paying. After a year or two, you should have a pretty good idea which of these will be constant and where you could save some money. Look at each expense and see if you changed your method of payment or if there is a way to lock in a better deal you can lower the expense. It is also a good idea to look at area rents and see if you are in line with the market. A few hundred dollars a month in either direction can make a huge impact on your bottom line. If you don’t like the numbers or can’t fix them, you can look at alternatives.
Dealing with tenants can be a very frustrating experience if you are not prepared for it. If you are overwhelmed with the amount of work or time needed to tend to a rental property, the most obvious solution is to hire a property manager. They will take care of all the minor items that can eat at your bottom line. This may not always be possible if you are running close to a negative cash flow. Under this scenario, you need to find out why your tenants constantly have issues and are calling you. In some cases, this could be how you take care of the property or if you didn’t spend enough time screening the best possible tenants. Not every tenant will be perfect and there will surely be issues with some tenants along the way.
If you are seeing little to no cash flow, you need to look at your options. Instead of selling just to get out of the deal at a slight profit, you can go the other way and look to add value. This will require you to spend money, but improvements can often add value to your property, increase rental amount and demand and reduce management time. If you upgrade your property you may be able to buy some time until the market turns. You don’t need to do a full rehab, but simple upgrades to the appliances and mechanicals could go a long way.
Cash flow is not the only reason you would buy a rental property. Sure, generating monthly cash flow is nice, but you are also building equity every time a tenant pays their rent. Instead of getting frustrated with the process after a few leases, you can ride it out and think about where you will be in five or ten years down the road. One of the worst things you can do is sell when you are frustrated and walk away from a property that you will regret. If owning a rental property was easy, everyone would do it. There will certainly be ups and downs. As long as you see the light at the end of the tunnel, you should stick with your plan.