13 Challenges to Owning Multiple Rental Properties
Owning one property is challenging enough as it is.
Owning multiple properties is just that much more challenging.
While the same skills that will make someone good at owning one investment will make someone good at owning several ventures, the very fact that there are so many more moving parts becomes an issue in and of itself. Even with the help of a property management company, owning multiple properties will require your involvement.
That doesn't mean it's not worth it. It means that knowing what you're getting into is very important.
1. Evicting Tenants
From a legal perspective, ousting a tenant, even one who isn't paying rent or causing damage to the property, is quite challenging. All the steps must be taken properly to avoid being sued. You can prepare yourself by thoroughly screening tenants, but even tenants who are right on paper and live problem-free for years can one day become an issue. This is merely one of the built-in risks of investing in real estate. That risk is multiplied when you own multiple properties.
2. Finding Tenants
Finding tenants is demanding. While technology can make pulling up records like credit or criminal histories easy, there's a lot more to screening a tenant. Either you or a property manager has to interview the tenant, follow up on references, and verify their reported income. Furthermore, this needs to be done quickly enough not to lose the tenant, but not too quickly that an unsuitable tenant slips through.
You need to have an extensive list of trusted contractors to perform emergency repairs, maintenance, upkeep between tenants, and replace big-ticket items like HVAC units or roofs. Having a few trusted contractors is essential if you have more than one emergency repair happening at the same time or have several units that need maintenance between tenants.
4. Tenant Complaints
A tenant may complain about repairs, other tenants, or neighbors. Some of these things may be within the landlord's control, and others may not be. However, not all tenants complain. A problem neighbor or a simple leak can turn into something bigger than it needs to be, so resolving issues quickly is important.
5. Time Management
It takes a significant amount of time to manage several properties or flip houses. Unless you love flipping houses or being a property manager, remember that your goal is generating a passive income. That means hiring a property manager is worth the 6 to 12% of collected rent (depending on location and services) because they're your best bet to keeping your involvement to a minimum.
Property managers take care of everything from tenant selection and rent collection to repairs and maintenance.
6. Your Investment is Not Liquid
It takes significant time and effort to sell a property if you need money right away.
7. Concentration of Assets
An environmental disaster or a major employer going out of business can lead to a significant loss if you limit yourself geographically. That's why a geographically diverse portfolio makes you a more resilient investor--it means you're less likely to be wiped out by any single issue. You want to utilize a property management company to increase your net worth in multiple markets.
8. Taxes, Fees, & Insurance
Whether you have a tenant or not, you'll always have to pay property taxes and insurance on your property as well as fees if you're a part of a homeowner's association (HOA). These costs, while not insignificant, are at least consistent, so you can always budget for them.
9. HOA Issues
If your property is part of an HOA, then the HOA's financials can impact your ability to get loans or find tenants. When considering whether or not to issue credit, lenders look at the delinquency rate and any pending litigation. Unfortunately, those two factors are outside of your control if you already own property within the HOA.
10. Getting Loans
Eventually, you'll have to switch from conventional loans to commercial loans because your debt to income ratio will be so high. That's not necessarily a problem, but it is another thing to consider.
11. Active Involvement
Even if you're working with a property management company and enjoying a monthly direct deposit, you'll still have to check out the property, sign off on repairs, fill out paperwork, and think about your investments and goals. The time commitment adds up, especially with multiple rental properties, but that's to be expected.
12. Selling Properties
Sometimes you have to sell your property. This can happen because of unforeseen forces like an increase in property taxes, a need for significant repairs, or a declining rental market. If that happens, then you'll want to sell your property quickly.
To avoid paying capital gains, you can do a 1031 exchange. You'll have 180 days or the date your taxes are due, whichever comes sooner, to finish your 1031 exchange. A 1031 exchange is also a great way to diversify your portfolio.
Investing in real estate only really works if you make a profit from selling your property. But when the time comes to sell, you may find yourself making less than you hoped for due to a dip in the market. Additionally, wear and tear can take a significant toll on your asset, which is one reason never to skip maintenance.
Owning multiple properties increases the amount of work that you have to do, but it also increases your passive income. Additionally, multiple properties can be a part of a geographically diverse portfolio, which will make you a more resilient investor.
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