You’ve bought the perfect rental property, you’ve found a tenant, and you’ve got a lease agreement in place. There’s nothing left for you to do but rake in the monthly profit, right? Not exactly.
While renting out your property has the potential to be an excellent source of passive income, if you’re not careful, your rental property can end up costing you more than you’re able to gain.
Here are five ways that rental properties lose money:
1. Low rental prices
When it comes down to it, the only way you can make a profit on your rental property is for you to make more in rent payments than you spend on mortgage payments, maintenance, and other rental expenses.
If you are charging tenants $1,800 a month, but you are spending just as much or even more money on paying for and maintaining your property, then you will lose money on your rental property and significantly limit your cash flow.
As a landlord, you should keep track of all of the expenses related to your rental property and see if there are any ways to reduce these costs to keep your rental property from losing money. If you aren’t able to lower your costs, but you still are losing money, that’s a strong sign that you are not charging enough for rent.
2. Troublesome tenants
Nothing will turn a profitable property rental experience on its head like poor tenants. If you don’t have high-quality tenants renting your home, it can cost you in more ways than one.
First of all, if your tenants do not pay rent in a timely manner, you won’t make any profit at all. When you have tenants that consistently pay rent late or stop paying rent at all, you won’t be able to pay your expenses and you will lose money on your property.
Even if you have tenants that are good about paying their rent on time, they can still cost you a lot of money if they don’t properly care for your home.
Tenants who let trash pile up until the home attracts bugs will lead to you paying extermination fees. Tenants who flush paper towels or other items that weren’t designed to be flushed down the toilet will add plumbing costs to your expenses. Tenants who fail to report maintenance issues may cause you to pay thousands of dollars down the road if these minor issues escalate into major ones. Although you should expect and budget for maintenance that covers unavoidable wear and tear from tenants, you don’t want increased maintenance costs because you have an irresponsible tenant.
Additionally, if you have tenants who are not paying rent or otherwise violating their lease agreement, you may have to pay hefty eviction costs. Between legal fees, court costs, property repair bills, cleaning fees, and lost rent payments, evicting a tenant can cost thousands of dollars. According to data from TransUnion, landlords who have to evict tenants pay an average of $3,500 in eviction-related costs.
When you have poor quality tenants, it will increase your expenses and cause you to lose money during the rental process. While it might seem like heavy tenant screening will require more time and effort than it’s worth, finding great tenants will save you countless dollars over time.
3. Maintenance costs
Even if you have the perfect tenant, you will have to shell out some money here and there for basic repair and maintenance.
If you keep up with routine maintenance, these costs will typically be minimal, and you should be able to budget and plan for them so that you are still making a profit on your rental property. However, if these maintenance issues go ignored, they can grow into significant problems that can only be fixed at a significant cost.
Does your roof have a small leak? Is it time for you to check on your HVAC unit? Are all of the appliances operating properly?
If you neglect to take care of small issues and conduct routine maintenance checks, your repair costs can end up costing you months of profit. While the rules of thumb are that landlords will spend roughly 1.5 times the monthly rent or 1% of their property value on maintenance costs each year, these costs are just the tip of the iceberg if the property is not well-maintained.
Major maintenance costs can cause landlords to lose money even when they have no trouble finding tenants and setting appropriate rent payments.
4. Poor housing market
When the housing market declines, it can lower the value of your property. This is usually due to factors outside of your control like economic instability or natural disasters. For example, the Covid-19 pandemic led to an average residential real estate market decline of 33% in the United States.However, even though the housing market declined during the pandemic, rental rates were climbing across the country. While it is never good for your property to lose value, it’s important to recognize that you can still continue to make money on your property through rent collection.
As you browse through websites with these factors and mind, you will be able to see which of the property management companies on your list will be the best fit for your specific needs.
5. Working alone
Landlords who don’t know how to properly screen tenants, charge and collect rent payments, take advantage of tax benefits, and find affordable and reliable businesses to complete property maintenance, may find that making money from their rental properties is harder than it looks.
If they charge too little for rent, they may not make enough to provide a significant cash flow. If they have to pay an arm and a leg for maintenance, they will limit their profits. If they don’t have a process in place to properly screen tenants, they may end up renting their property to someone who won’t pay rent or who doesn’t treat their home with respect.
Rental properties need to be managed properly in order to stay profitable. If a landlord doesn’t have experience or extensive knowledge about the rental process, they may end up losing money on their property. If you want to avoid this situation and make sure that you are able to build a passive income when renting your property, you should hire a property management company.
RentSimple, the best property management company in northern Virginia, helps landlords avoid common mistakes and pitfalls that decrease profitability so that they can make the most of their rental properties. From high-quality tenant screening to guaranteed rent to calculating and collecting rent, RentSimple makes it easy for landlords to make money by renting out their northern Virginia homes.
See how RentSimple can help you start selling your rental property today when you contact us!