Ask any landlord what their motivation was, and the most common answer will probably be profitability. Buying real estate and renting a property to tenants can be a highly profitable endeavor if you’re able to charge more for rent than you’re paying on a mortgage. You can make even more money when you sell the house, assuming its value increases over time.
However, there are a handful of factors that could deteriorate—or even eliminate—your profitability.
These are some of the biggest factors that may influence your profitability:
- Appliance wear and tear. Your tenants are going to consistently rely on the installed appliances, including the refrigerator, stove, and if you have them, washer and dryer. These are necessary for daily living, but they also have moving parts and are in frequent use, so they’re going to naturally deteriorate over time. When you get a call that one isn’t operating properly, you’ll face the difficult decision of whether to repair or replace the appliance. A repair may take some time, saving you money, but may not last long. A new appliance will cost you more upfront, but could fix the problem for a much longer period of time.
- Emergency repairs. Inevitably, something’s going to go wrong at the property. The roof might spring a leak, the plumbing might get backed up, or some structural component will fail and make the place unlivable. When this happens, it’s your job to fix it as soon as possible—no matter how expensive it is. Some experts recommend setting aside one percent of a home’s value for annual repairs and expenses, but some years will naturally be more or less than this amount.
- Problematic tenants. Some of your tenants are going to be problematic. They may not pay on time (or at all), may damage your property, or may cause problems for your neighbors and other tenants. All of these issues will interfere with your profitability (and annoy you as well). Unfortunately, there’s no reliable “quick fix” for this. Instead, you have to take your time screening tenants until you find the optimal occupants for your property.
- Prolonged vacancies. Tenants will come and go; that’s the nature of the businesses. When one leaves, you’ll need to be careful who you select to replace them, but at the same time, you’ll need to worry about your ongoing profitability without a main source of income. The shorter your vacancy periods are, the better.
- Marketing and advertising. In an effort to fill your vacancies as quickly as possible, it’s a good idea to do some marketing and advertising. You can list your building on popular real estate websites and services, and pay to make your listing more visible. However, this too will eat into your profitability. If you can, rely on as many free methods as possible.
- Poor rent pricing. You’ll need to do some careful math when selecting a potential property. You’ll need to understand exactly what you’ll be paying on a mortgage every month, and also what similar property rentals are going for in the area. If you set rent prices low, you’ll attract more tenants and can fill vacancies faster, but you’ll also be less profitable, especially over time.
- Unforeseen real estate fluctuations. Most landlords invest in real estate knowing that rental income will offset mortgage costs, but the real secret to profitability lies in home appreciation. Unfortunately, the real estate market is difficult to time and predict, so you may end up losing value on your home if you aren’t careful. Unexpected fluctuations can be killers.
A Note on Time
Profitability is likely one of your biggest concerns as a landlord, but it shouldn’t be your only concern; after all, you’ll be investing more than just money in your property. You’ll also be investing your time.
Managing a property takes more time than most people imagine. Though you may go weeks without hearing from your tenants or experiencing any problems, an emergency call or a late rent check could call you into action, costing you multiple hours of work when you weren’t prepared for it. If you have other responsibilities, such as a job and/or a family, this can be draining.
Owning a rental property can be profitable and rewarding—but only if you’re prepared for the challenges you may face along the way.