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If you already have a few rental properties in your portfolio, then you can understand how it might divide your attention and resources. As a result, some rentals might start to suffer and underperform, effectively diminishing profitability.
It's essential to address underperforming properties before they become irreparable, but you must first identify which ones are operating poorly. Here's how you can identify underperforming properties in your real estate portfolio, as well as how you can improve profitability.
Key Highlights:
- Common warning signs include declining rental income, high vacancy rates, and rising operating expenses, all of which can lead to negative cash flow and impact your overall portfolio performance.
- Address income drops by realigning rent with market trends, reducing vacancies through stronger marketing and tenant retention strategies, and lowering costs by improving maintenance efficiency and management practices.
- External issues like increased competition, economic downturns, and rising utility or vendor costs can affect profitability. While they can’t be avoided, landlords can mitigate risks through strategic planning and property upgrades.
- Prevent underperformance with proactive maintenance, maintaining cash reserves, leveraging property management software for insights, screening quality tenants, and staying informed through consistent market research.
- Evaluate underperforming assets based on financial metrics like net operating income, ROI, and potential sale profits. If recovery seems unlikely due to external pressures, selling may be the smarter move.
Identifying the Common Signs of Underperforming Rental Properties
Most landlords will tell you that a rental starts losing profitability once you spot the trifecta of business deterioration: decreased rental income, high vacancy rates, and rising operating costs. These all contribute to a negative cash flow, and a property that's underperforming financially can eventually affect your better-performing assets.
- A decreased rental income means a continuous drop in profits, not the temporary issues like the occasional decline you might experience outside of peak seasons.
- High vacancy rates can mean that your property's rental rates do not match market trends, or that you're failing to secure tenant satisfaction.
- Rising operating costs can be caused by a lot of things. It can be due to the current economic conditions, but it could also be caused by the lack of regular property maintenance. The more neglected your investment property is, the higher the maintenance costs.
The good news is that these are problems that can be corrected with the right approach. Your underperforming property's financial health can be restored by tackling each problem with the appropriate action.
Declining rental income can be fixed by analyzing market trends to compare rental values with similar properties. You can make data-driven decisions based on the numbers you find. Once you have a clear understanding of market rates and other key metrics, you can set the right rental rate.
Prolonged periods of vacancy can be fixed with a two-step approach. One is adjusting your marketing strategies to find long-term tenants, and another is finding ways to boost tenant satisfaction to reduce turnover.
Rising operating expenses can be a result of bad market conditions or poor property management. If it's the latter, you can begin by streamlining operations and making it more efficient. Start by addressing deferred maintenance issues and updating systems if you have an older property.
Factors You Can't Control
The financial performance of your rental property can also be influenced by external factors, and unfortunately, you cannot control these circumstances. What you can do is mitigate risks and plan recovery strategies.
- Increased competition: Tenant demand depends on the number of properties you have to compete with in a certain location. An underperforming property can gain an advantage by adding desirable amenities or offering incentives for renewed leases.
- Economic downturns: A bad economy can quickly turn your area into a poor location. When there are no jobs or if costs are rising, potential tenants will look elsewhere, and tenant turnover will increase. Landlords have to prepare for turnover costs, which will be harder to cover with declining demand.
- High utility and maintenance costs: Even with regular maintenance, a bad economy can raise the prices of all services, including utilities and vendor services. You can install energy-efficient features to reduce costs, or even smart features to attract modern tenants.
How You Can Stay Ahead
You won't need to identify underperforming properties if you go for a more proactive approach in tackling these issues. Falling short and stabilizing your cash flow is harder than going beyond with your landlord duties.
Proactive Maintenance
Before your property becomes an underperforming asset, find potential issues that can become costly when ignored. Upgrade your systems before they cause risks. Conduct routine maintenance to identify issues at their early stages.
Cash Reserves
There's no guarantee that your cash flow will always be stable, which is why a safety net is recommended as part of your investment strategy. Always set aside enough money to cover costs for a few months, or unit your portfolio returns to its profitable state.
Advanced Tools
Using technology like property management software can help you both streamline operations as well as gain critical insights into your rental property's finances. Some tools automatically detect declines in your operations, allowing you to implement targeted actions to resolve the matter.
Tenant Screening
A major property management task is screening your tenants meticulously to ensure they follow your lease rules, such as paying monthly rent on time or maintaining the rental unit. An underperforming asset can also be due to bad tenant quality, which can be avoided by identifying red flags early on.
Market Research
Staying tuned with current conditions can help you foresee market expectations and react accordingly. Market analysis is required to make informed decisions, such as setting the right rent price and adding the sought-after amenities.
Should I Keep or Sell My Underperforming Property?
Some underperforming assets can still recover with the right plan and execution. However, in other circumstances, external factors make it more ideal to sell instead of continuing to rent them.
Consider financial metrics like net operating income and cash flow, return on investment (ROI) on equity, and potential profit from sale. If you're unsure how to make accurate calculations, hire an expert in real estate investing, who can also offer advice based on the outcome.
Underperforming Rental Property FAQs
What is the most common cause of underperformance in rental properties?
- It is often due to rentals being left unchecked. When property owners have several rentals in their portfolio, it's easy to neglect one property among the rest.
Can landlords recover from unprofitable rental properties?
- Yes. Issues like high turnover or increased maintenance costs can be fixed, but there are factors like market conditions or economic downturns that you simply have to survive.
What are the first signs of a rental property underperforming?
- Stagnation in rent growth and high turnover are the first signs of bad performance in a rental real estate. These should be addressed immediately before they become harder to resolve.
Recovering From a Slump With Expert Help
Managing one rental property can already be overwhelming, so it's not hard to understand why overseeing multiple rentals can sometimes feel impossible. This is why many real estate investors make sure that there is always a property manager on site.
With the help of professional property management services, none of your investment properties will be overlooked. Management fees will be a minuscule price to pay compared to what you will earn when your property's value is maximized.
Contact us, and we can discuss how to make your income stream stable.
