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How to Help Your Clients Lessen the Risks of Rental Property Investment

July 8, 2013 in Blog

Although the housing market has yet to reach a full recovery, housing investment has soared in recent years. As the National Association of Realtors (NAR) has noted, investors purchased 1.23 million houses in 2011. Property investment purchases made up more than 27 percent of 2011 house sales, which is the highest percentage that the NAR has ever reported. There are several reasons why home investment purchases are at an all-time high. Across the United States, house prices have fallen an average of 35 percent. Experts predict that between 800,000 and 1 million houses will be foreclosed on annually for the next several years.

Many real estate agents have found that one of their largest client demographics is now composed of real estate investors, many of whom are amateurs. Most people do not realize all of the risks associated with investing in a rental property, and, as a result, many amateur investors do not succeed.

There are many reasons why real estate investments fail. Some of the most obvious problems include neglecting to plan properly, not setting clear objectives, and not taking the time to perform market research. However, investment expert and CEO of MACK Companies James McClelland argues that poor property management is the primary reason new investors fail when they seek to invest in a rental property. When new investors seek to invest in a house, they tend to think only about the problems and costs associated with acquiring the house and preparing it to be rented; they do not think about the many difficulties associated with managing the property. Many investors fail to choose good tenants or are too busy to help their tenants when there is a problem with the property. This is where a good property manager becomes significant in helping maximizing profit and reducing headaches.

Reasons to Hire a Professional Property Manager

When real estate agents are showing a property to an investor new to the housing market, they likely will not realize the many risks associated with purchasing a rental property. It is important for real estate agents to help their clients understand the many things that can go wrong when managing a rental property. A few small problems can turn a successful investment venture into a headache that not only wastes the investor’s time but also drains his or her bottom line. Some of the financial risks include:

1. Upkeep Costs: While homeowners often inject much capital into property
maintenance, tenants are much less likely to do so because they do not have a
financial stake in the property. Property owners will have to finance the property
repairs.
2. Vacancy Rates: The average rental property has a vacancy rate higher than 10%,
meaning that it will not have a renter for at least one month during the year. Since the
property does not generate income for the investor unless it has a tenant, even a small
vacancy rate can drain the profitability of the property.
3. Bad Tenants: Amateur investors often struggle to choose good tenants for their
property. Choosing a bad tenant often leads investors to evict him or her, which can
take time and cost money. A prominent property management firm estimates that an
eviction generally costs an investor about four months’ worth of lost rent.
Real estate agents can help their clients deal with these risks by suggesting that they
hire a professional property manager. Property managers have experience with the
difficult aspects of property management, including choosing quality tenants,
collecting rent, and performing upkeep on the property. Many property managers visit
their properties per month to collect rent from tenants and to keep an eye out for any
repairs that need to be done. Moreover, if something goes wrong with the property,
property managers will have their client’s back; they will take care of all the hassle
involved with restoring things to normal.
Investors can expect to pay a property management firm about a month’s rent for the
firm to get the property leased, as well as roughly 8%-15% of each property’s monthly
rent for the firm to manage the property. Investors often recoup these fees, though,
because property managers often lessen vacancy rates and take care of minor upkeep
issues before they become major problems. Most importantly, property management
firms give investors peace of mind about their rental property.
Cristal Drake: “As a real estate veteran of the Orange County market, my go-to team
for professional property management is White Glove Property Management.

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