5 Most Common Ways Rental Properties Lose Money
So, you’ve decided to invest in rental properties. Excellent decision! There are so many benefits to owning rentals, including cash in your pocket each month, tax benefits, equity building, and most importantly the passive income they can generate.
You know you want to invest in them, but where do you start? There is a lot more that goes into the success of a rental property than just buying a house at a good price. It is important to know what factors are truly important in ensuring financial success.
The following is a list (ideas from Ali Boom, February 2014) of the 5 ways most rental properties lose money:
- Price-to-rent ratio. This term refers to how much it costs to purchase a property versus how much rent it can bring in. If the price-to-rent ratio on your property doesn’t add up, you will consistently lose money every month.
- Bad tenants. Assuming your price-to-rent ratio is intact, the next fastest way to lose money on a rental property is with bad tenants. Worse than ending up with bad tenants one time, is ending up with bad tenants consistently. Vacancy is bad news! Bad tenants may stop paying rent for some reason, and the eviction process can be timely and costly for the owner.
- Maintenance. Tenant damage can definitely cost you money, but slacking on the general maintenance of a property can cost way more. Roofs, HVAC systems, wiring, siding, appliances, flooring, basically anything not kept up, can become costly. Anyone who has ever owned a house, whether for themselves or as an investment property, knows how quickly these costs can add up.
- Declining market. What happens if the market starts declining? Maybe a major industry goes out of business or a natural disaster hits, who knows? Or maybe it’s just consistent population decline. Either way, the value of your house will drop. The good news is the value of a house doesn’t matter if you aren’t trying to sell it. If you have good tenants the incoming rent money will continue to support your mortgage.
- Not using a tax professional. One of the biggest financial advantages to owning rental properties is the tax benefits. If you do your taxes correctly, you are likely to set yourself up so that the income you earn on the properties ends up being (essentially) tax-free and then you may even get more money in tax benefits on top of that.
After reading this article, don’t be scared away from buying rental properties. All of the above certainly sounds horrifying, but with the right property manager, and good common sense, rental properties will usually continue to generate profit and collect value.