On paper, property management seems like a kind of golden ticket. If you have the right properties in your portfolio, you can sit back, relax, and watch the cash roll in. All you have to do is handle a handful of maintenance requests now and then, and your tenants will send you tons of money every month.
As any seasoned real estate investor can tell you, this is an exaggeration. While active real estate investing can be extremely lucrative, and it is possible to generate passive income with this strategy, there are also some ugly truths and caveats you need to keep in mind.
Let’s dig in.
Ugly Truths About Buying and Managing Texas Properties
These are some of the ugliest truths about buying and managing real estate in Texas.
- No one can predict the real estate market. No matter how much the “experts” try to tell you otherwise, the truth is that no one can accurately predict the future of the real estate market. There might be some indicators of near-term growth in the Texas real estate market, but because there are literally thousands of economic variables to consider, we must describe the future as fundamentally unpredictable.
- Vacancies are more common than you think. A vacancy can harm your financial model, forcing you to continue paying for a property that isn’t generating revenue. And these aren’t rare occurrences; depending on where your property is and what kinds of tenants you attract, you may have to deal with vacancies regularly.
- Maintenance expenses can cripple your earnings. Maintenance and repairs can be expensive, eating into your earnings. You’re probably already prepared for costs associated with ordinary wear and tear, but major issues have the potential to crush your emergency savings and compromise your profitability.
- Overpaying can wreck your profitability model. Speaking of compromising your profitability, overpaying for a property can be detrimental to your property management strategy. A property might be highly attractive to prospective tenants and in a high-demand neighborhood – but if the price is driven up too high because of competition from other buyers, it may be a worse investment than a comparable property in a lower-demand neighborhood.
- Tenant screening isn’t just a formality. Some new property investors see tenant screening as a kind of formality. After all, a tenant wouldn’t apply for an apartment or house they couldn’t reasonably afford, right? Unfortunately, tenant screening is a practical necessity to make sure you have qualified tenants in your property.
- Insurance isn’t always foolproof. As the property owner, it’s wise to have an insurance policy that protects your investment. However, some insurance policies have holes that may preclude you from making claims in certain situations; for example, you may not be covered in the event of a flood or fire. Always double-check your policy so you understand your coverage.
- Tenants have more rights than landlords. Laws vary from state to state and from city to city, but generally speaking, tenants have more rights than landlords. For example, landlords have the right to enter a property, but tenants have a right to privacy, so unless it’s a genuine emergency, you must provide advanced notice to your tenants before entering.
- Price increases aren’t guaranteed. Historically, the real estate market has performed exceptionally well. Homeowners have relied heavily on the prospect of steadily rising home prices to build their net worth. But price increases aren’t guaranteed, especially in local markets and especially in the near term. A sudden downturn can jeopardize your investment.
- Buying and selling are both expensive. We all know that buying a house can be expensive in the sense that houses fetch a high purchase price. But buying a house is typically associated with other expenses, like the cost of home inspections, appraisals, closing costs, attorney fees, and more. If you’re selling a house, you’ll face expenses like repairs, home staging, agent commissions, and taxes. No matter what, you’ll be hit by extra costs.
- A bad lawsuit can be devastating. Disgruntled, injured, and neglected tenants may be motivated to sue you for damages. Landlord insurance can protect you from some of these liability issues, and mitigate the damages, but you may still be on the hook for certain losses. Forming an LLC can help you shield yourself from personal liability.
3 Tips to Minimize the Impact of These Ugly Truths
We’ve shown you the ugly side of managing properties, but that shouldn’t dissuade you from pursuing this revenue generation strategy. Nearly all of these ugly truths can be accounted for and mitigated, and you can start this process with the following strategies:
- Work with a property management company you trust. Property management companies are there to handle nearly all of the recurring responsibilities associated with managing rentals, including finding tenants, screening tenants, collecting rent, dealing with issues, and even handling evictions. If you have a team of experts you trust, much of the work will be done for you – and you’ll get competent recommendations for strategic changes whenever appropriate.
- Plan conservatively. Plan conservatively to avoid being blindsided by potential issues like extended vacancies, unexpected maintenance needs, and real estate market downturns. If you’re always prepared for the worst-case scenario, it’s impossible to be caught off guard. If your profitability model is conservative enough, you can almost guarantee that an investment is worthwhile.
- Build a more robust portfolio. Expanding and improving your property portfolio can also be valuable. If you have 10 units active at a time, a single vacancy isn’t going to do much damage. If you have properties in a few different cities, local real estate fluctuations can’t severely impact your net worth.
Buying, selling, and managing properties is a challenging but incredibly rewarding endeavor for those risk tolerant and financially prudent enough to take it on. Everything gets much easier when you’re working with a competent team of experts – like the real estate agents and property managers at Green Residential. Contact us to find out more today!