Purchasing a rental property is a popular investment strategy for many investors. This technique helps to generate monthly passive income while simultaneously building wealth. Rental property investments typically include some form of risk. The risk the investor faces is defined as the chance that the actual outcome of the investment differs from your expected result. Risk, with regard to a rental property owner, appears in many forms. The following include some of the most common reasons why rental property owners fail.

1.  Selecting the Wrong Properties

Many rental property owners face investment risk because they make uninformed property decisions and choices. As a rental investor, there are a variety of aspects to consider when deciding if a rental property is an intelligent business decision. Most investors use a strategic formula known as a Return on Investment (ROI).

For instance, investing in a property that is priced too high will likely underperform due to an error in the investment analysis or the investor’s judgment.

The best way to reduce this type of rental property investment risk is to:

• Master the marketplace metrics relevant to the property.
• Partner with a financial, real estate, or property management professional, especially when first starting out and learning the nuances of rental property ownership.  

2. Insufficient Capitalization

Appropriate investing requires capital or the money to support the rental property, even in lean times. The amount required depends on the rental property owner scenario, which is typically unique. Deficient capital leaves a rental property owner open to a host of legal consequences that could include foreclosure, property liens from unpaid contractors, etc.

A healthy reserve of capital should be set up as part of the business plan because, ultimately, a rental property owner may be forced to sell the property at an inopportune time. This is especially painful for investors because the loss was completely avoidable with some simple business planning.

3. Disorganized Recordkeeping

Disorganization in recordkeeping leads to poor or sloppy decisions, some of which may lead to significant consequences. Recordkeeping for rental property owners includes the management of property records, resident files, property owner records, finances, licenses/certifications, insurance paperwork, and contractor records, to name a few.

Appropriate record management as a rental property owner is crucial as it impacts the data used:

• To compile and file tax returns.
• As evidence, should you become the target of a tax authority audit.

4. Not treating the Rental Property Like a Business

It's essential for a rental property owner to approach ownership in rental properties as a serious business. Not treating the investment as a business is often a wake-up call for the property owner. The rental property, to remain profitable, must be managed consistently, with well-defined plans and an informed owner or representative.

5. Selecting the Wrong Residents

The wrong resident has the potential to create significant issues for a property owner. So, selecting the right resident for the rental is extremely important.

First and foremost, a rental property owner must follow several laws. Then it's important to have a clear idea of who the ideal resident would be. It's also essential to know how and where to market a rental unit as this may impact the pool of applicants.

Property owners should screen potential residents.

A credit check can be used to demonstrate the applicant’s willingness and ability to manage their finances smartly and within reasonable limits. Credit profiles also reveal legal records that may speak to previous foreclosures, collections, judgments, etc.

You should also ask for documentation regarding the applicant’s work and work history. This usually includes pay stubs or W2s. Finally, if the applicant previously rented, call the former property owner to confirm that they paid as agreed.  

6. Failing to Hire the Right Property Manager

Anyone who has owned a rental property has discovered that it often requires a commitment of time, money, as well as effort. And for some who are handy or live locally, managing a rental property may make sense.

This is not always the case. These are the many responsibilities that can be handled by an experienced property manager:

• Assisting in setting appropriate rental rates based on a market study. Rental rates are an important facet in achieving a balance between maximum monthly income and the maintenance of a low vacancy rate for the property.
• Managing the collection of monthly rent.
• Marketing available units that help avoid extended vacancies.
• Selecting the right renter.
• Managing the relationships with vendors.
• Managing renter issues.
• Ensuring the investment property remains compliant with housing and property laws and regulations.

Property managers are flexible and happy to customize a plan that works for each individual investor. The right property manager can alleviate an owner’s burdensome tasks and often find hidden ways to help improve the bottom line.