When you’re considering an investment property, you first need to complete a full rental analysis to ensure that your investment will be profitable. To do that, you’ll look at figures like the mortgage, taxes and insurance and compare them to your monthly rental income to determine whether you can make a comfortable profit. Easy enough, right?
Table of Contents - 4 Things That Will Kill Your Cash Flow
Not so fast. Those regular monthly figures aren’t the only thing you need to think about when calculating the potential profitability of a rental property. There is plenty of irregular and unforeseen costs that you’ll also need to consider. If you don’t plan properly, these expenses will kill your cash flow and eat into your profitability.
Your rental analysis assumes that you’re receiving rental income every month to cover the cost of your monthly payment on the house. But what if you’re no longer receiving that rental income? Your lender doesn’t care what the situation is with your tenant; you are still responsible for your payment. You’ll have to reach into your cash reserves to cover the costs until you can fill the unit.
Your priority should be to avoid a vacancy. If you have a good tenant in place already, do your best to provide excellent customer service and meet the tenant’s needs promptly. Even if the tenant must move, he or she will be happy to recommend your space. If you need to find a new tenant, keep your place clean and well maintained and offer a competitive price. Aim to keep a couple months’ worth of savings on reserve in case it takes longer than anticipated to find a new tenant.
A shady tenant is worse than no tenant at all. At least if the unit is vacant you can show it to promising new tenants. But shady tenants are going to cause you a big headache. Bad tenants might damage your property, pay rent late (or not at all) or drive out your other renters if you have nearby units. The eviction process can be lengthy and requires paperwork and other legal fees.
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There’s no guarantee that you’ll avoid a bad tenant, but there are steps that you can take to screen your candidates. Always request an application from potential candidates listing basic personal and employer information. Invest in a tenant screening package (prices range from $20 to $40) that will show you the tenant’s credit history, criminal background and any past evictions. Remember that the applicant will need to give permission first.
If you choose to forego this step, you could be stuck with a tenant who not only skips out on rent but who also refuses to vacate the unit for weeks or months while you move through the eviction process.
The insurance policy you have on your rental property is different from the insurance policy that you have on your primary residence. You’ll need to make sure your policy covers your unique situation and obligations as a landlord.
Like insurance on your primary home, there are two types of coverage for your rental property:
Property coverage protects against any damage to structures on the property and/or the owner’s contents. Depending on your policy, only certain types of damage may be covered. Policies typically cover damage due to theft, vandalism, fire and falling objects.
Liability coverage protects you if you’re responsible for injury or harm to someone else on your property. If a tenant is hurt because the property was poorly maintained and decides to sue you, liability coverage can help protect you.
It’s important to keep a detailed list distinguishing what property inside the home is yours versus the tenants. For example, the tenant may bring his or her furniture, but the washer and dryer are your property.
Landlord insurance can offer you additional coverage in cash-killing scenarios. If you need to perform maintenance on the home to keep it safe but are unable to house tenants and collect income during that time, insurance can help to cover your losses. Insurers will generally cover you for the shortest amount of time it would take to fix the damage.
Landlord insurance typically doesn’t cover damage caused by general wear and tear, burst pipes, rodents or pests, landslides or earthquakes or intentional damage. It’s important to maintain your property to avoid any damage caused by the above threats.
An ineffective property manager
A great property manager can be a huge relief to a landlord who is unable or simply doesn’t want to handle the regular property management tasks. While you’ll need to allocate some of your cash flow for paying a quality property manager, it’s well worth it for the expertise and service a property manager brings.
If the property manager is ineffective, it could cost you even more than a wasted fee. Property managers are a key tool in maintaining occupancy in your units. Property managers can create a positive environment where tenants feel safe and respected. They are also crucial in ensuring that maintenance is performed promptly to avoid further damage. A bad property manager is slow to perform his or her duties and charges you extra for any little inconvenience.
As you would with your tenants, do your research before hiring a property manager. Find one who comes well recommended by other landlords in your area. Read the work agreement thoroughly to ensure you aren’t stuck paying any hidden costs. Because this person will have access to your unit and your tenant’s space, perform a proper background check to ensure your property manager is trustworthy.
Cash flow is crucial to your real estate investment success. When evaluating a property for its profit potential, don’t forget to plan for unforeseen costs that could kill your cash flow. Do your due diligence when it comes to finding and keeping tenants, buying insurance and hiring a property manager, and always keep plenty of cash on hand just in case.
Top 5 Rental Property Investment Killers
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