Buying an investment property can set you up for financial freedom and success, but the wrong investment can do just the opposite, which can cause headaches. If you feel uncertainty surrounding your investment, there are some common problems (and solutions) that you may need to examine.
Buying an investment property in a hot market can be a whirlwind of an experience. According to one recent study, properties in Massachusetts – home to the red-hot Boston market – spend only 22 days on the market before selling. That doesn’t give buyers a lot of time to make up their minds.
Once the dust settles, you may find that the investment property you bought isn’t performing as you thought it would. This is more common than you may realize—but the problem might be fixable. Let’s look at some of the most common signs that you might have bought the wrong investment property, and how to fix them.
Costs Are Out Of Control
Many people who buy property find that they have underestimated the costs associated with their purchase. This could include upfront expenses like closing costs or ongoing costs like property taxes, maintenance, or insurance. Careful due diligence should give you a pretty good idea of the costs you’ll face, but you can always get hit with surprises. Local taxes can increase, insurance rates can shoot up, and the roof of your new property could spring a leak. According to one recent study, the average homeowner spends $24,529 on their property each year, above and beyond their mortgage payments. Naturally, investment properties with more than one unit can incur expenses many times that amount.
While costs like taxes are pretty fixed, you can sometimes bring down insurance costs. Look into your policy’s details; do you need all the coverage you’re paying for? Comparison shop among different insurance providers to make sure you’re getting the best rate. You can also look into getting your property or liability insurance from the same company that handles your car, home, or life insurance, as this type of “bundling” can often get you a significant discount.
Of course, you could handle this problem by raising rents. This will depend mostly on what the local rental market will bear. You might also be restrained by prior agreements if you bought a tenant-occupied property.
Your exploding costs could result from bad luck or poor planning, or alternatively, it can be the result of undisclosed issues. If your new property has problems like termites, mold, an unstable foundation, or subpar construction, you may have bought from an unethical seller. Depending on the disclosure laws where you live, you may have grounds for legal action. Consult with a local real estate attorney to learn about your options.
The Property Isn’t Meeting Your Appreciation Targets
When you own an investment rental, there are two main avenues to profit: cash flow from renting the property and appreciation. But markets aren’t always predictable, and a down or even flat market can throw you off your targets.
This can be even more painful if your vacancy rate is higher than you predicted, and you’re paying carrying costs with zero cash flow on an investment that’s appreciating slowly or not at all.
There’s no straightforward fix here. Make sure you do your due diligence on the front end; if you’re looking at investing in Philadelphia vs. New York City, make sure you understand the local markets. Still, all the due diligence in the world can be spoiled by a sudden market slide. Your options are to either wait and hope that your property appreciation will spike in the future or get out and sell now. Before making your choice, you should carefully study your local market, focusing on similar properties, and consult with other investors you may know.
Maintenance Is Taking Up Too Much Of Your Time Or Money
It’s common for home buyers, occupants and investors alike, to be surprised by how much maintenance a property requires. If you’re a novice investor, make sure you understand not only how much work your investment is going to need, but also how much that maintenance is going to cost.
If you’re acting as a landlord, the demands of the job may be a surprise to you. The reality of being a landlord is that you’re on call 24/7, and if a tenant calls about a clogged toilet or malfunctioning appliance at three in the morning, you’ve got to get out of bed and take care of it. While innovations like landlord apps can streamline this process and save you some time and effort, it’s still going to be a big job.
Many investors use a third-party rental management company to look after their investment properties. This can allow you to be more of a hands-off owner, since the property manager will take care of routine repairs and maintenance, collect your rents, and even screen new tenants.
The only potential catch is that it can be expensive. Property managers generally charge a percentage of the rents they collect and expenses for work they handle. That can add up quickly. If they’re not efficiently filling vacancies, or are bringing in tenants who don’t pay in a timely manner or damage the property, paying a property manager can quickly become a losing proposition.
There isn’t necessarily a clear solution for having a high-maintenance, expensive property. If you can’t find a way to reduce the demands of the property, either by performing quality repairs or adjusting your tenant standards, you may have to sell.
Your Investment Is Taking A Toll On Your Mental And Financial Health
Owning an underperforming investment can be stressful. You might have a lot of money going out and little or no money coming in. If you’re low on cash reserves or had overly optimistic projections, the stress and disappointment can be intense.
In this situation, you want to try to reduce your costs as much as possible. Can you refinance your mortgage to a lower interest rate? Can you change insurance providers? Look closely at your operating budget and look for areas you can trim.
This highlights the importance of going into your investment with sufficient cash reserves. Don’t assume you’ll be working with the best-case scenario; to be safe, assume the opposite and plan accordingly. You don’t want to be running too close to the edge if the market takes an unexpected downturn, or you get hit with some long vacancies. Missing a mortgage payment can have a lasting negative impact on your long-term financial health.
In the end, owning an investment property, even one that’s humming along efficiently and profitably, is probably going to be a little stressful at times. If this level of stress is severely impacting your quality of life, it’s possible that property investing isn’t for you, or you need the help of experienced industry professionals to take off some of the load. In these instances, joining a local rental association and potentially hiring a property manager may help you bridge the gap.