Many landlords struggle to generate cash from their investment properties. Here are five reasons why.
I have said it before and I will say it again: bringing in more in rent each year than you send out in expenses is the key ingredient for a buy-and-hold real estate investor to turn a profit.
Without positive cash flow, your time as an active real estate investor will be limited. So why is your property not generating cash? Here are some possibilities.
1. You Paid Too Much
In real estate, you make your money when you buy, not when you sell. Paying too high of a price for a house is perhaps the number one reason landlords end up with no leftover cash each year. When you overpay you will struggle to make a profit from day one.
To avoid this losing scenario, you really need to know and understand your market. Study long and hard what homes are listed for and end up nabbing in your area. Look at dozens of properties before you buy.
2. Your Rents Are Under Market
Rents across the country have been rising.
Unfortunately so has the cost of maintaining a home, such as taxes, utilities, insurance, and repair costs. Have your rents kept pace with these rising costs? If not, check to see if your rents are at current market rates. Check local ads on Craigslist. Ask a realtor you know. Call the phone number listed on rental signs and talk with other investors. The knowledge you gain will help you determine the appropriate market rent for your property.
Related: Is Now a Good Time to Raise Rents?
3. Your Turn-Over Is Too High
Tenant turn-over is a cash flow killer. You need long-term stable tenants to turn a profit each year. To reduce turn-over, screen out frequent movers. Make sure not to raise the rent out of line with your local market. Keeping it even a bit under market can pay off.
Be attentive to tenant needs and requests. Keep your properties clean and maintained.
4. You Are Spending Too Much
Clean and properly maintained properties are a must. But that does not mean you need to pay top dollar for repairs and upgrades. Calling the service companies with the largest ads will likely end up costing you more than you need to spend. Having your tenant call any old repair pro and then sending you the bill also will likely result in you paying more than necessary.
Find and develop relationships with contractors and other service personnel that will work with investors and not charge premium (retail) rates. They can be hard to find but they are out there. Get referrals from your local Real Estate Investors Association or from other trusted contractors.
5. You Are Spending Too Little
Properties simply have to be maintained.
You cannot cut your way to profitability here. If you let your properties deteriorate and do not complete necessary repairs, your tenants will eventually get fed up and move. You’ll also develop a slumlord reputation, making it difficult to attract new tenants. Renters you do attract will not be the most desirable. This situation can easily send a property into an ever deepening downward spiral. Don’t let it start.
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