Reducing Rental Property Investment Risks
2011 was a record year for real estate investment. According to a recent report from the National Association of Realtors, 1.23 million homes were purchased by investors last year, accounting for 27 percent of all existing home sales, the highest total percentage ever recorded. With home prices down 35% nationally, and reports indicating that foreclosures will continue to flood the market at the rate of roughly 800,000 to 1 million per year, new real estate investors are being minted in unprecedented numbers.
Unfortunately, not all of these newbie investors will succeed.
While common problems such as a lack of planning, unclear goals, and inadequate market research will always be contributing factors to nonexistent or negative profit margins for a certain percentage of real estate investors, a larger percentage will fall prey to what James McClelland, CEO and president of the single family home investment firm MACK Companies, calls the "Number one reason why people fail at real estate investing"---poor property management.
Many investors treat property management "as an afterthought" and end up in over their heads when it comes to self-managing their rentals, McClelland states in the recent article "The Number One Reason Why Real Estate Investments Fail." They choose problematic tenants, or, if they manage to find good tenants, find themselves unable to respond as quickly as they need to when things go wrong.
Reducing Investment Risks with Professional Property Management
While it's tempting for first time investors to downplay the very real risks that come along with rental property ownership, there are several ways that a good investment on paper can quickly turn into an unprofitable venture in reality. Make-or-break factors include:
- Turnover and vacancy rates: The biggest factor in generating an acceptable profit margin on a single family rental house is simply keeping it rented. An average annual vacancy rate of more than 10% (or about 1 month per year) can often wipe out profits.
- Evictions: Without proven tenant-screening methods, first-time landlords often end up renting to unqualified tenants, which frequently ends up necessitating eviction proceedings. According to a recent survey conducted by All Property Management, the average evictions results in the equivalent of four months' lost rent.
- Significant maintenance costs: Generally speaking, tenants are not as invested in the upkeep of their homes as they would be if they owned the property. This can result in small maintenance issues escalating into situations that require expensive repairs.
Knowing how to prevent these scenarios is where professional property managers come in. With even the smallest firms typically managing upwards of 100 properties at any given time, property managers are experts, by necessity, at managing the risks associated with rental property ownership. They have proven methodologies for key aspects of rental management, such as tenant screening, rent collection, and handling routine and emergency maintenance.
McClelland's management company, for example, has developed the best practices of sending property managers to collect rent in person every month. This helps ensure that rent is paid on time, and it gives the managers the chance to lightly inspect the property each month as a matter of routine.
Not only do professional property managers know how to reduce risks that something will go wrong with a rental property investment---if something does go wrong, they'll handle it. From calling in contractors to handle maintenance issues to doing all the legwork involved in an eviction, a professional property manager will handle any issues that arise, protecting the property owner's time and money at every step.
Property Management Fees and ROI
While fees may vary by area, most property management companies charge the equivalent of a month's rent to get a property leased, then between 8 and 15 percent of the monthly rent to oversee the occupied property, collect rent, and provide basic upkeep.
In most cases, professional property managers pay for themselves by reducing vacancy rates, turnover rates, and addressing maintenance issues promptly---leaving rental property owners to enjoy an essentially passive income stream.