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Vacancy and turnover
2
Maintenance and repairs
3
Legal issues and disputes
4
Market fluctuations and competition
5
Tax implications and benefits
6
Here’s what else to consider
Owning rental property can be a lucrative and rewarding investment, but it also comes with some financial risks that you should be aware of. In this article, we will discuss some of the common challenges and pitfalls that rental property owners face, and how to mitigate them.
Key takeaways from this article
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Thorough tenant screening:
Carefully vetting potential renters is crucial. It can prevent a lot of headaches down the line, such as costly evictions or property damage. Take the time to check references and credit histories to safeguard your investment.
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Stabilize rent prices:
Keeping rental increases minimal or non-existent can be key to retaining good tenants. Loyal renters mean fewer vacancies and less turnover, which helps maintain a steady income flow from your property.
This summary is powered by AI and these experts
- Rich Lauletta Real Estate Investor / Developer /…
- Christopher Williams Real Estate Loans
1 Vacancy and turnover
One of the biggest financial risks of owning rental property is vacancy and turnover. When your property is vacant, you are not generating any income, but you still have to pay for the mortgage, taxes, insurance, maintenance, and utilities. Turnover also costs you money, as you have to advertise, screen, and sign new tenants, as well as clean, repair, and update the property. To reduce vacancy and turnover, you should set a competitive rent price, screen tenants carefully, maintain good communication and service, and offer incentives for renewals.
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- Rich Lauletta Real Estate Investor / Developer / Agent / Coach
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Remember the importance of proper screening. I’ve seen landlords accept an unqualified tenant because they wanted to fill the unit and start collecting rent…But you’re better off having it sit vacant a little longer if it means waiting for the right qualified tenant. Dealing with a bad tenant, evictions, etc. is much more costly in the long run!
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- Christopher Williams Real Estate Loans
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It’s important to screen your tenants- it’s better to stay empty or vacant until you have quality tenants- So long as you don’t need to raise rents every year you will keep loyal tenants-
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Delinquency is a direct result of poor screening. The right screening with direct-to-payroll income validation and full criminal/eviction checks at the courthouse level are the only ways to prevent fraud. Most don't know their screening is missing major components that put them at financial risk.BetterNOI halts application fraud attempts.
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- Roman Pavlik Luxury Division Director at Laurie Finkelstein Reader Team at Keller Williams Dedicated Professionals
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If you own a condo, then special assessments are a killer for cash flow. These are happening more and more. It just happened to me where i am getting a $40,000 assessment on one of my condos and it will add $300 per month to my payments for 10 years. This is happening a lot more since municipalities are forcing condos to do upgrades (many unnecessary) and will probably be forcing hoas to budget for full reserves for replacement for all future items, and also the condo has to pass the 40 or 50 year certification. So be careful on condos for investment that have not passed the 40 or 50 years certifications yet. If you choose to be a landlord on a single family home, then nobody can tell you which ugrades you need to do.
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- Miguel Fernandes Real Estate Manager | Real Estate Analyst | Investment Analyst | Believer in ever-evolving Real Estate
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First of all, understand your local market!Be it laws and regulations or even how to and where to publicize the property, every little bit is important!Vacancy might not be a great issue, times are hard and there are shortages of properties for rental in most cities so, as long as the value is not above market, interest will follow.In my experience, the hardest part is the screening process, between the amount of interest your property might get, the amount of verification needed, and choosing the next tenant, time flies.Maintenance also represents a risk factor, as you might have to have the property vacant for a long time if the previous tenant did not follow civilized society.In the end, luck might be a great factor too!
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2 Maintenance and repairs
Another financial risk of owning rental property is maintenance and repairs. As a landlord, you are responsible for keeping the property in good condition and complying with the health and safety codes. This means you have to deal with regular wear and tear, as well as unexpected issues such as leaks, pests, appliances breakdowns, and vandalism. Maintenance and repairs can be costly and time-consuming, especially if you have to hire contractors or deal with emergencies. To minimize maintenance and repairs, you should inspect the property regularly, perform preventive maintenance, have a reserve fund, and enforce the lease terms.
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- Daniel Cunningham Host of the Apartment Academy podcast. CEO of Leonardo247 ➞ Serial Proptech Entrepreneur.
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Here's a few inspections that every property manager should be conducting on a regular basis (at LEAST annually) in order to mitigate the risk of equipment breakdowns or casualty insurance losses:1) Roof2) Balconies & handrails3) Pool gates & equipment4) Individual unit (detector batteries, HVAC filters, leaks/mold)5) Boilers6) Playground equipment7) Laundry room drier vents8) Trip hazards (e.g. stair treads, uplifted concrete)9) Playground/fitness center10) Parking/pedestrian gates11) Water treatment for chillers12) Snow removal/salt logsBTW we include these and many more in the standard Leonardo247 library of inspections used by our multifamily clients
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- Wayne Mullett, C.E.T. Strategic Advisor, Asset and Portfolio Management
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Define your maintenance strategy;Life support vs life cycle maintenance. Utilize life support methods (patch and repairs) for conformance and occupant safety.Utilize life cycle methods (replacement at end of life components),not only for conformance and occupant safety, but to also maintain higher property value and equity opportunities.
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See AlsoWhy More People Are Choosing to Rent Instead of Buy - The LegendsRent-to-Own Homes: How the Process Works9 Reasons to Buy a House Rather Than Rent | RBFCUHow Does Rent-to-own Work?Support
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- Bernard Gyapong Facilities and Construction management professional | Digital Marketing Specialist | Aspiring Data Scientist
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As property manager, SLAs, and lease agreement, should help mitigate this issue of cost of maintenance. Not all maintenance issues need be born by landlord. Some can be transferred to the client. The agreement, should clearly state what part is borne by the tenant. Punitive measure can be established in same agreement to help minimize the risk to landlord. Ultimately, scheduled inspections, planned maintenance and quick response to emergencies are the bedrocks to reducing cost of maintenance, no matter who bears the risk involved.
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- James Jones Master Building Inspector Environmental Testing -Property Inspections-FAA Drone Pilot-Certified Thermographer sUAS
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Multi-family properties should have a capital reserve fund. Performing a property condition assessment will allow you to have a schedule of the remaining useful life of all the major building components. Having this type of multi family inspection performed at the initial purchase of the property will allow you to successfully maintain the property over the life of your ownership. A capital reserve schedule will keep you ahead of the curve minimizing your unexpected expenses.
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- Tim Hadley Commercial realtor , Accredited Land Consultant
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I recommend new landlord have at least $3500 per unit in reserves for unexpected repairs until they have at least $17,500 for there first 5 units. Then if a leak happens or furnace goes out you can afford to fix it. It is irresponsible to have renters if you cant fix a emergency repair.
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3 Legal issues and disputes
Owning rental property also exposes you to legal issues and disputes that can affect your finances. As a landlord, you have to follow the federal, state, and local laws and regulations that govern the rental industry. These include fair housing, tenant rights, eviction procedures, security deposits, privacy, and more. If you violate any of these laws or regulations, you could face lawsuits, fines, penalties, or loss of license. You could also face disputes with your tenants over rent payments, damages, repairs, noise, or other matters. To avoid legal issues and disputes, you should educate yourself on the laws and regulations, hire a lawyer if needed, use a standard lease agreement, document everything, and resolve conflicts amicably.
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- Miguel Fernandes Real Estate Manager | Real Estate Analyst | Investment Analyst | Believer in ever-evolving Real Estate
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Legal issues with tenants are a great concern for property owners, they might represent costs, time investment, and bad outcomes, to minimize the occurrence of such situations, one should always be up to date on applicable laws and have a regular solicitor to take care of lease agreements and issues that might arise from the letting a property.Alternatively, proprietors who might be less interested in being involved with the process have the choice to have a property management company take care of all the issues. This affects the return on investment but may be the best option for someone who prefers to invest their time in different matters.
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the saying privilege is invisble to those who have it. say for example you dont raise rent for a long time. if something happens and you have to raise the rent, the tenants might take it personal. always use or consult someone that knows.
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- Nacho Pinazo Moreno Real Estate/ Debt servicing
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El impago de la renta puede bloquear los ingresos del arrendador y por tanto este verse afectado por el incumplimiento de una de las principales obligaciones contractuales. Contratar un seguro de impagos, hacer un buen scoring económica y solicitar documentación como nóminas para hacer un estudio previo de los inquilinos reduce riesgos. Solicitar una garantía adicional de una anualidad previo a la firma del contrato también mitiga los riesgos del impago.
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Because owning rental property exposes you to legal issues, I think it's important to not "wait" until legal representation is needed or when an actual issue arises. Like with my real estate clients, I encourage them to always begin the process of choosing an attorney as early as possible. Many questions they often have require more in depth explanation from legal experts and Realtors cannot interpret the law. Because of this, I advise my clients to form a partnership with their attorney. Many legal issues can arise, so having an attorney that is full service and/or that has a specific practice really helps the owner with handling different types of legal matters. Having an attorney is worth the investment to you and the tenants.
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- Christopher Williams Real Estate Loans
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If you have your tenants sign a California Association of Realtors rent or lease contract your pretty much protected-Most people who use a realtor have that benefit but other landlords who do their own lease or rental contracts may differ
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4 Market fluctuations and competition
Another financial risk of owning rental property is market fluctuations and competition. The rental market is influenced by supply and demand, economic conditions, demographic trends, and consumer preferences. These factors can affect the rental rates, occupancy rates, property values, and desirability of your property. For example, if the economy is weak, the demand for rentals may decrease, or tenants may look for cheaper options. If the supply of rentals is high, you may face more competition and have to lower your rent or offer incentives. To cope with market fluctuations and competition, you should research the market trends, adjust your rent price accordingly, differentiate your property, and add value to your tenants.
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- Trevor Henson, PMP CMO | Entrepreneur | Trojan | EO LA Member | Investment Property Addict | Multifamily Syndication | PMP | Forbes Contributor | Bourbon Aficionado
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Owning multifamily Investment properties comes with financial risks, especially from market shifts and competition. In my experience, the risk can be mitigated with a proactive strategy to focus on community building and enhancing the tenant experience. This involves creating a living environment so appealing that it not only justifies your rental prices but also builds a loyal tenant base. This can be achieved through regular maintenance, common area upgrades, and responsive property management. Key takeaway: Develop & execute a Tenant Experience and retention plan at your apartment buildings. It not only helps to keep current tenants but also attracts new ones, ensuring your rental property is competitive even in fluctuating markets.
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- Dave Prasad Build. Create. Innovate. Repeat.
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A landlord that purchased in 2015 for $500,000 can easily account to reduce rent in a downturn market as opposed to a similar property purchased in 2022 for $900,000. Always base investment costs on inflated figures and add an extra 1-2% on interest charges. We noticed frequently similar properties in the market sometimes renting for $50-$80 p/w less. Further research shows the landlord purchased multiple years ago, and despite increased interest rates they are still better off having purchased 5-10 years ago and can afford the hit in market fluctuations.
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- Tarsiah Taman Chairperson at Sabah Women Advisory Council
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As in all businesses, competition prevails. Be alert on the market trends particularly on rental rates, consumers' common requirements and tastes.
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- Sherry Cabrera, Broker Texas Real Estate Broker/Real Estate Advisor/Relocation Specialist in Frisco, TX.
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Real estate markets can fluctuate. Changes in property values, rental rates, and overall market conditions can affect the profitability of your investment. Know your local market well. Certain schools, zip codes and neighborhoods can increase or decrease your market value. Also, economic downturns may lead to decreased property values and demand for rentals.
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- Sharon Edwards REALTOR: Be Kind, Work Hard, Stay Humble and treat all People with Respect
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Rental Prices in my market area have peaked. When this happens, you might need to be more flexible in offering shorter lease periods, and/or offer to pay the water bill, since it can become a lien on the property for non payment and automatically increase your property tax, which you as owner are responsible for anyways.
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5 Tax implications and benefits
One of the financial aspects of owning rental property that you should not overlook is tax implications and benefits. As a rental property owner, you have to report your rental income and expenses to the IRS, and pay taxes accordingly. However, you can also deduct many of the expenses related to your rental property, such as mortgage interest, depreciation, repairs, insurance, property taxes, and more. These deductions can lower your taxable income and save you money. To maximize your tax benefits, you should keep track of your income and expenses, consult a tax professional, and take advantage of the tax breaks and incentives available to you.
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- Luis Arias ALL Inclusive Real Estate Services- Broker/REALTOR® REALTY ONE NEW MEXICO
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Someone else in your tribe, brokerage, neighborhood or real estate world, should always be there.Laws are made from someone that didn'tike it at some point! Their money? Their business.I'm not getting their real estate license for my biz, mine is already oooold. I'll point them to a professional on that part...
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- Tarsiah Taman Chairperson at Sabah Women Advisory Council
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Any income is likely to be taxable. So be prepared to include the costs in the final rental rates. Be informed on the latest tax brackets and incentives.
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- Susan Klemenz-Moran Investment Real Estate Professional
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Real Estate Investments offer FLEXIBILITY in Income Tax Planning. For example, the property owner has the FLEXIBILITY to pay additional principal payments on a high interest loan early, or they may decide NOT to pay the principal down if the interest rate is favorable to other investment opportunities.More importantly a real estate investor has the flexibility to refinance with the intention of taking cash out of a property with high loan to value ratio in order to finance the purchase of a second property to bring additional income using more borrowed funds, and therefore using leveraged capital to increase yields. 👍Increase yield by using borrowed funds for additional income opportunities (leveraging)👍
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- Jorge Gonzalez Empowering Financial Excellence: Seasoned CFO Merging Innovation with Strategic Insight to Drive Business Transformation
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Report Income and Expenses: Accurately report all rental income and expenses to the IRS.Utilize Deductions: Take advantage of deductible expenses such as mortgage interest, depreciation, repairs, insurance, and property taxes, which can reduce taxable income.Maintain Records: Keep meticulous records of all income and expenses for accurate reporting and to support deductions.Seek Professional Advice: Consult with a tax professional to ensure compliance and to maximize tax benefits and incentives available for rental property owners.
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- Jodie Schickerling 🗝️ Director | Estate Agent ⬥ Property Manager ◆ Commercial Property Consultant
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My expertise is in leasing and managing property across all sectors NOT to provide tax advice.It is my duty to my clients to leave this to the experts and this is where my network of property lawyers and accountants are so important. Providing referrals to trusted partners to get the best advice leads to client satisfaction and getting the best outcomes. The tax benefits and implications are changing frequently, only legal and accounting professionals can be trusted to ensure your clients best interests are always being looked after.
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6 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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- Jeff Kershaw SCSM Vice President - Group Manager @ JLL | Property and Asset Management
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Timing is everything. Government can spoil the whole thing. Cap Rates are an illusion, or almost so. Fundamentals will save the day.
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- Eva Hamori Navigating the Future of Real Estate: Your Ally in Property Management Advice
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Today the biggest concern is covering your mortgage. as interest rates skyrocket. Owners are struggling to cover their costs, and are hit with 30% increases between the bank, vacancy & turnover costs, cost of materials from damage and increasing tax rates as their property values go up. While renters complain about the RTB scheduled 3.5% annual increase for 2023, it does not even come close to the costs owners and investors have to deal with.
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- Zeno Kobica
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Discussing the financial risks of owning rental property is vital, but it's equally important to consider the broader social and economic context. The lack of quality rental homes in many markets is a significant issue. This scarcity often leads to higher rental prices, making affordable housing less accessible for many individuals and families.While it's crucial for property owners to be aware of and manage the financial risks, it's also important to recognise the potential positive impact of investing in this sector. Providing quality rental homes can help address the housing shortage and contribute to community stability. Therefore, balancing the financial considerations with the societal need for affordable, quality rentals is key.
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- Sean O'Connor President of Thriv’ Construction INC.
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Additional factors include interest rate risks and the current capitalization rate properties are trading at. If you are using leverage as a tool to finance a project you may find yourself in a situation where the market value of the property has decreased and the current interest rates have increased making your property undesirable to refinance when the term of the current note expires. Another lender may also not be willing to finance the property. Use caution while using debt to put together projects.
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- Gordon PUTTICK Senior Real Estate Agent at Successful Ways Real Estate
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Investing in property is not a short term thing, its long term (8-12years), anything shorter is not investing its speculating.
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