These two newbie mistakes will cost you tens of thousands of dollars in lost equity.
Are you a new real estate investor? Great! It’s one of the best ways to build wealth. I’m an experienced multi-family and commercial property manager. If you haven’t hired a property management company yet because you don’t have enough properties to make it financially worthwhile, here are two important tips to help you with self-management:
Mistake #1: Charging Under Market Rent
I often hear new real estate investors talking about keeping their rents lower than market rate in order to “keep their tenants happy” and “in the unit longer.” They reason that doing so they will not incur the cost of vacancy. They don’t realize that they may be losing money in one of two ways.
1) Tenants that pay below market rates tend to remain silent about repairs. They want to stay off the landlord’s radar so their rent isn’t increased. This means that they will try to self-repair any maintenance issues in their unit. They likely won’t repair it properly and don’t care if down the line it causes you problems because they can just move out. So what could have been a $300 repair years later is a $3,000 repair!
Ironically, this hurts your tenant and future tenants in the long run as years of this behavior leads to a poorly maintained (and possibly dangerous) living conditions. Keeping rents at market rate benefits both parties.
2) Lower-than-market rates tend to attract less-than-ideal tenants. The more aligned with market rate (or even slightly higher), the better qualified tenant you’ll attract. That is, they tend to have better paying jobs and can afford your rent. They’ll also expect the unit to be in good working order and will contact you if repair is needed, which allows you to enter their unit and keep on eye on usage and state of repair.
Eventually, you may want to trade up your duplex, triplex, or quad for a small apartment complex or commercial building. At that time you’ll want your property to be in its best physical condition and be receiving at least market rate rents. Selling an investment property is not like a home. A potential investment buyer will ask to see your financials to assess its performance. This is where how you manage your property can increase or decrease its market value. Poor physical condition from years of lack of proper maintenance combined with less-than-market rents will likely equal a huge loss of market value to the tune of tens of thousands of dollars. See example below.
Mistake #2: Hiring a Property Management Company, but Not Holding Them Accountable
I once took over a 40-building property that was previously managed by a well-known third-party commercial property management firm. Most of our commercial lease tenants were responsible to pay for their own utilities, yet this PM firm was paying for upwards of 50% of them. Or rather, the owner was paying for it! This accounted for a huge operating cost which decreased the owner’s NOI (net operating income) and therefore the property’s value as well (see example below).
How can you avoid this happening to you? Check your financials diligently. Don’t assume your PM firm is doing a good job – verify it. If you’ve been managing your own rentals before handing off to a PM firm, you’ll know what your expenses should be. Therefore hold your firm accountable when there are spikes in costs such as utility bills, repairs, etc. Not doing so can have an adverse affect on your property’s market value.
Have questions? Contact me.