When you think of situations that endanger your rental property income (and your rental property itself), what are the first thoughts that come to mind as an investor?
For most of you, we'd be comfortable placing a hypothetical wager that these are some of the first things you think of:
- Accidentally placing a terrible renter in your Sarasota rental homes (think 'Professional Tenants')
- Damage caused by storms or other 'freakish' acts of nature (we do get the occasional hurricane here)
- Incorrectly pricing your real estate investments (causing you to lose out on potential profit each month).
If you guessed at least one of these, you're on the right track when it comes to the topic of today's article. Some of what we're about to discuss will be an obvious offshoot of the very first issue (the quality of your renters). That said, one of them might even surprise you—but it's an issue we see plague investors as a Sarasota property management company all the time.
Foreword: The following article is not a substitute for legal counsel. The information contained herein was current as of the time of writing. If you need immediate help with a pressing issue concerning your rentals, turn to a competent attorney or our Gulf Coast experts for real-time assistance.
#3: Decreasing Property Values
This is a situational risk, which is why it earned the lowest rank on our list of risks—but we'll explain why it can be a potential problem for investors.
Normally, decreasing property values are only an issue for those in real estate who treat rental properties like a form of 'stock' rather than a long-term, buy-and-hold investment. If you're speculating on the value of your rental property increasing over time because you plan to sell it later for more than you paid, decreasing property values can suddenly become a serious issue.
For example, take the market crash that happened during The Great Recession. If you purchased a Sarasota rental property with the intent to sell later after your property had some time to appreciate, then you may have found yourself underwater in 2008. This is the kind of emotional rollercoaster oil investors shared in 2020 during the pandemic's peak.
That said, if your intent was simply to hold onto your property, it's likely that your rental rates didn't change all that much. In fact, as a direct result of The Great Recession, you likely found yourself with an increasing supply of renters; if anything, your rental rates have likely gone up a bit over time.
So, if decreasing property values are traditionally only a concern for investors looking to sell at some point in the future (and one you can ride out if you hold your property long enough), why would we include this as a risk to watch out for?
- Property values don't simply fall as a result of massive housing busts: they can also be indicative of systemic issues (such as increasing crime rates) that may also impact your volume of potential renters.
- Renters 'vote with their feet' just like homeowners do: the top two concerns they typically have when selecting a property are affordability and location.
- 'Location' and 'affordability' often compete, so you'll want to keep an eye on this.
- If you're a Sarasota rental property owner with the intent to hold your properties long term, watching neighborhood values—and investigating localized drops—is still an important metric.
While it's challenging to control for this, investors can still take active steps to address this issue during the initial research phase for a property and after-the-fact. Installing security systems like smart doorbells or motion-activated lighting can be inexpensive updates that even bring a boost to your monthly rental rate if you find the issue is caused by rising crime.
Before adding any additions to your rental properties, it's worth going over the numbers with an experienced Sarasota property management company. They may spot an issue that you can't detect with an internal perspective.
#2: Selecting the Wrong Renters
This is one of the more obvious factors impacting the success of your real estate investments in Sarasota, but we feel as the experts that it's vital to touch on it anyway.
- Your renters drive the success of your investment property picks. Placing the wrong renters damages your potential for rental income directly in both obvious (and subtle) ways.
- Among these, the most noticeable are any damages your renters deal to your investment during their stay. This can range from anything as simple as slashed-open screens to make smoking easier all the way to a complete property renovation because your renters had 40 goats.
- 'Invisible' damage can also be costly: smoking on the property or the illegal production of harmful substances like Methamphetamine can leave residual traces that are pricey to treat.
The wrong renters can also cost you in other ways, such as the tremendous 'sticker shock' associated with vacancies. Many Sarasota rental property owners underestimate the damaging cost of a vacancy on their income—but it can be exorbitant.
Beyond the obvious loss in rental income that drags on for as long as you don't have a paying renter, investors also have to account for the costs of marketing and listing their investment, the time cost associated with showing the property, the potential expense of any updates needed to attract new renters—the list goes on.
While it might protect you from acts of nature, you can't always count on your insurance coverage to handle any necessary repairs you may need after a run-in with a 'Serial Squatters.' The easiest way to address the potential for extreme damage from renters is to ensure that your tenant screening process is the best it can be.
You absolutely cannot afford to skimp on this, so if you can't handle it yourself, it's worth the cost of letting a professional Sarasota property management company handle this for you. Plus, it reduces your own upfront liability to leave it in the hands of a trusted third party.
#1: Purchasing the Wrong Rental Property
This is an issue that doesn't just plague Sarasota investors—it's a nationwide problem that impacts your potential earnings before you ever settle on a rental property. If you're new to real estate investing (maybe you inherited a property), the following statement may not be immediately obvious but is nonetheless accurate: Not every property will make a good rental home.
- Before you ever try to find a renter, you need to find the right investment property. This requires undertaking some serious research—even if some of the calculations you need to perform are so simple that you can do them on a napkin.
- Even if the numbers look good to you, don't be afraid to ask for outside opinions—in fact, we recommend that you ask for several, and from different sources. Your Sarasota property management company is a great place to start.
- Investing clubs and investing groups are also a great option and can even help you forge some connections with other investors to tap into leverage for your future investments using Other People's Money (OPM).
The rental property you select sets the stage for all that is to come. If your expenses on a property are going to exceed your income potential, that's a bad investment. Don't put yourself in this scenario—and start with the right research to prevent it. Doing so can often alleviate the risk potential associated with our #3 slot on this list as well.
What Are Other Risks to Watch Out For?
If you're eager to learn more about how to protect your investment property and rental income, a great place to get started is with a free copy of our resource, Protect Yourself and Your Investment: A Guide for Landlords in Manatee & Sarasota Counties.