The surge of excitement for most investors who buy a rental property might not last forever. The investment strategies that some people make can affect the overall profitability of home used as a rental. Regardless of location, some properties never seem to materialize and some investors are left with little cash six months to one year after a home purchase. Learning how rental properties lose cash flow can assist a new investor with long-term planning.
Immediate Factors in Loss of Income
There are key indications for savvy investors to know when an investment is losing its worth in the market. One of the most common ways that a property loses its income potential is when the monthly rent prices are too low. Just like apartment building managers, a good property manager for a rental home can help increase the cost for rent that tenants pay each year. Not keeping up with these changes can cost investors future income.
Turnover apart from low rent collection is a deal killer for some investing clients. When too many people move into and move out of a property in a small period of time, analysis of the neighborhood can be one way to help curb high turnover. Local economies that are fledgling or that have increased in property crime are also reasons why turnover is high for some types of homes that are positioned near major cities.
Lack of Upgrade Expenses
Long-term tenants appreciate that homes are upgraded over time. Someone who moves into a home in 2014 expects that new appliances and other amenities should be available after a decade. Not upgrading appliances, painting, interior or exterior sections of a home can easily cause a loss of income. By freshening up a property, a new source of renters could be attracted to the home once a standard lease agreement is terminated with a client.
Costly Repairs and Maintenance
A property owner can quickly go broke when paying the highest market rates for a minimum amount of work. In key markets like Florida, Texas and California there are contractors everywhere. Price is always negotiable on any repair or upgrade. Without insulting a contracting company with a low bid offer, prices can be kept to a minimum when work needs to be completed. A good property management company can assist with reducing expenses each year for maintenance or upgrades.
Purchase Price Was Too High
One of the last and final ways that income is reduced for investors comes from the purchase price of the property. Someone who paid market value or close to this number at the time of acquisition will never profit right away. The costs of running an investment property business coupled with maintenance costs can quickly eat away any profits made on rental income. By being a smarter investor and buying at the right price, costs can be controlled and profits can be accumulated faster.