Rent Sense: Smart Owners Avoid Mistakes
By Neil Fjellestad and Chris De Marco
FBS Property Management
Some investors become independent rental owners by design as a result of well-planned financial strategy and/or the advice of a trusted CPA or CFP. These “strategic investors” usually employ recommended professional property management as well. Others are “situational investors” due to inheritance, a market condition or a personal requirement that results in the non-occupied ownership of a property. Regardless of how or why you have become a landlord you are now in the “rental business”.
So what are the mistakes that when avoided separate the smart owners from the typical landlord? Here is a short list-
Requiring an arbitrary rent rate: Setting the rent without strict adherence to the current market will hamper your ability to get the best return on your investment. The home priced “right” generates the most collected rental income over the length of ownership.
Not enforcing the lease: There are times every owner wants to be “nice.” Playing the “nice guy” is usually counter-productive. Residents who get away with paying late once may continue to do so every month. An unauthorized pet can do considerable damage that won’t be covered by a pet deposit. The new roommate/love interest/spouse not on the lease is not liable if the rent is unpaid or the premises are damaged and may be difficult to evict. Often owners let things slide to the point that their protections intended in the terms of the lease may not be enforceable.
Letting little things get big – Minor repairs have a way of becoming big problems when let go for too long. Leaking pipes can eventually result in major water damage. That little electrical problem can cause a fire. Responding quickly to a repair request both heads off bigger problems later and increases resident satisfaction. In addition, making a repair that’s not necessary but relatively inexpensive can increase resident satisfaction and a factor when it’s time to renew or increase the rent.
Mistaking cheapness for frugality – While it’s important to be frugal when operating the property, remember that the least expensive option is not always the best. A higher quality product or procedure can pay for itself with a longer “useful life” or decreased maintenance costs. It’s often more cost efficient to replace an appliance when the repair bills are mounting. Buying an energy-efficient appliance may have incentives or rebates that make it more cost effective. In addition, spending a bit more on quality work or products sends a customer-friendly message to residents that might help explain a rent increase.
Letting insurance or other payments slide – It’s imperative to stay on top of all property expenses; particularly the reoccurring ones. Even an unintentional lapse can be expensive if unnoticed or unpaid. Owners have found out that their homeowner’s policy was expired after their property suffered from fire or other damage. Unpaid property taxes can result in substantial penalties or worse, the forced sale of the property. An unpaid contractor or water bill can result in a lien on the property that can make it difficult to sell or transfer later on. Not responding to filing requirements by local, state and federal tax authorities can cost time and money. These behaviors can also affect the owners’ credit.
Overleveraging your property – Leverage is a powerful investment advantage and the primary reason why the financial return for independent rental ownership continues to outperform other alternatives. It is also the primary pitfall for inexperienced investors. If the investor does not have sufficient equity the rental property will always produce a negative cash flow. This underlying condition clouds every operational discussion and decision. The negative cash flow owner needs unrealistic rent, stalls to make smart repairs, allows bad tenant behavior as long as rent is paid and is likely to push back on annual premiums, etc. All of the above is complicated when these owners (in the name of cost cutting) go it alone without professional fulltime property management. Actually, the landlord’s increased liability more than offsets any costs reductions. Unless equity in the property is increased through paying down outstanding loans and/or re-positioning the rental operation and physical condition the property value deteriorates until sale or foreclosure.