5 BIGGEST MISTAKES PROPERTY INVESTORS MAKE THAT COST THEM TENS OF THOUSANDS IN LOST PROFIT
People buy investment property for one reason, to build wealth. As a property investment specialist, I’m constantly shocked at how property investors are losing 10’s thousands of dollars investing in property. The thing is, they don’t realise it. So here are my five biggest mistakes property investors make that cost them tens of thousands in lost profit
STOCK MARKET VS PROPERTY INVESTING
Have you ever heard an investor who owns BHP shares say to you, “BHP wanted to give me a $7,250 dividend this year, but I told them to keep it. It’s OK. They probably need it more than me”. Property investors do this all the time. “Oh, they are good tenants. I don’t want to lose them, so I will keep the rent low for years, and while it means I will retire much poorer than what I’d like. It’s OK.”
Compound rent is like compound interest. Have you heard how savvy investors invest a small amount of money monthly into the stock market, and over 30 years, that small monthly investment has ballooned into millions of dollars?
Rental increases are similar. I have a client whose weekly rental income started at $380 PW and is now at $680PW. So they currently earn $300 PW more than they used to. Over 15 years, they will make a staggering extra $225,000 in income.
I have also met property investors that need to do this. They have increased the annual rent by just $50 a week over the same time so that they will retire with considerably less money.
STOCK BROKERS VS PROPERTY MANAGERS
Property Managers are not stock brokers. They think their job is to manage the tenant, collect the rent and handle maintenance, which is fair enough because the real estate industry has gotten this wrong for years. I know many property managers that do this very well. They manage the tenants and the maintenance and collect the rent.
Compared to a stock broker whose job is to advise their clients what stocks to invest in to maximize their return on investment.
Property managers need to maximize the property investors’ return, just like what stock brokers do for their investors. Of course, part of maximising a property investor’s return includes managing the tenant, collecting rent, and coordinating maintenance, but there is a lot more to it than that.
Property investors need to be made aware that how their property manager is looking after their investment is costing them their retirement.
SO WHAT ARE THESE 5 MISTAKES COSTING PROPERTY INVESTORS THEIR RETIREMENT?
TINY RENTAL INCREASES
Recently, a property investor asked their property manager if they would like to increase the rent that’s coming up. The investor was shocked by this question. Of course, they would. So the property manager then suggested a $5 or $10 a week increase.
Sadly this is common. Most property investors employed by an agency manage many properties. They have little incentive to increase rent and do not want to have that awkward conversation with the tenant they have now gotten to know and like.
At Asset Agents, we do market research and then increase the rent to the current market value, which needs to be done annually.
NOT WANTING TO LOSE THE TENANTS
I hear this a lot. “They are great tenants, and I don’t want to lose them.” Many property investors think that once they get a good tenant, they need to keep rent low, so they stay for an extremely long time. If an investor is already wealthy, sure. That’s a beautiful idea.
ASSET AGENTS
At Asset Agents, we have primarily great tenants. They usually pay the annual market increase, and only some rarely move on. When they do move on, we typically find other tenants that are often even better than the ones we had before.
I have a lot of clients who tell me their tenant must be the best tenant we have. While their tenants are excellent, our clients must realise that most of our tenants are just as good or better because of our strict tenant selection process.
The entire concept of keeping rent low to hang onto good tenants comes from the property investor having a bad tenant experience in the past or hearing all the horror stories.
Keeping rent low for a good tenant is an inferior investment strategy if you want to build wealth and be in the best financial position for retirement.
PLACING POOR TENANTS
When I meet a new investor, their biggest concern is a tenant that will trash the place. Yes, this should be a concern. We have taken over many properties where the tenants we inherit are shocking, and how could a property manager even have approved them?
At Asset Agents long ago, we realised that if we invest time in choosing the right tenants and doing reference checks, rent is paid on time, and the property is looked after. It makes our job much easier too.
SHOPPING ON FEES
The first thing an investor asks me is, what are your fees? They should ask what you can do to maximise my return on investment.
Property managers with the cheapest fees are often the most expensive.
It’s natural for investors to want the best deal. By doing so, investors assume getting the best property management fee is the most innovative way to maximise their returns.
Property investors who save a few dollars on fees can quickly lose thousands of dollars in profit for many reasons, such as if the property is sitting vacant or rent is not being increased annually.
Fees are tax deductions. Most agencies’ fees range from 5% to 10%. So the difference is insignificant, and indeed, loss of profit will be costly for the property investor.
DID NOT REALISE YOU COULD CHANGE PROPERTY MANAGERS NOW
Changing property managers is super easy. Many property investors assume that while a tenant is in a lease, they can stay the same as the lease connects to the current property manager. A property investor can change property managers anytime they want & the best time to do that is when a tenant is in a lease so the new property manager can take over quickly.
Either the new property manager can email the old manager on behalf of the property investors, or the property investor can send the current property manager a quick email giving the existing property manager 30 days’ notice. The new property manager will do the rest. The best time to change property managers is right now. There is no need to wait for the lease to expire or for the property to be vacant. Changing now will allow the new property manager to see the situation and make recommendations.
STORIES THAT WILL SHOCK YOU
I have oodles of whacky property management horror stories. But here are just a few very recent ones.
SIPPY DOWNS
Property in Sippy Downs leased for $430 PW. The lease expires in 10 months. The property manager has already signed a new 12-month lease for when the current lease expires in 10 months with a $10 increase to $440 PW. So the tenant has been locked into a lease for almost two years, which has created a few issues. First, the rent is meager. Also, the owner now wants to sell. Because the rent is low and the tenant is locked into a lease for almost two years, the owner will have to sell for a lot less than what they should be able to get.
What should the property manager have done differently? Mainly offer a lease renewal around eight weeks before the current ones expire. Instead of keeping the rent low, it would’ve been better for the owner to have researched the market and offered the tenants a lease renewal similar to the current market rent.
KAWANA ISLAND
The tenant moved into a home on Kawana Island, paying $600 PW, through another agency. Eight weeks into the lease, the owner asked if we could do a remote rental appraisal. We did some market research and found that comparable properties in the area rent for around $680 PW. This owner is losing a staggering $4,160 over the 12 monthly leases. I assume the property manager they engaged needed more research to understand potential rental income.
Even though this tenant is in a 12-month lease, this owner has moved their property to us, so we are now managing it & we will do a new rental review as the lease becomes due.
Suppose you are a property investor with an investment on the Sunshine Coast and feel your property might be rented. We can offer you a free remote rental appraisal. It’s like a health check. Even if your lease is not coming due soon, if the current rent is low, it will allow you to make plans for an increase in the future which you can do through your current property manager. Of course, you would be more than welcome to move your investment property to us now, as the everyday property investor did in preparation too.
MAROOCHYDORE
Lease renewal in Maroochydore. The tenants currently pay $580 PW. The property manager asked the owner if they would like to increase the rent. The owner was surprised by the property manager even though they might not have. The property manager suggested a $5 or $10 weekly increase. The owner was shocked the property manager would consider such a slight increase when comparable properties are being leased for $700 PW or more.
These owners realised they needed a more professional property manager in Maroochydore, so they moved their property to us to look after. They did this while the tenants were still in the 12-month lease at $580 PW, allowing us to manage the communication about adjusting the rent for the new 12-month lease offer.
MISTAKES PROPERTY INVESTORS MAKE – FINAL WORDS
Reading this article, you can see this aims to maximize a property investor’s investment return. This reading may terrify a tenant. Over the years, there have been plenty of times when property investors have had to snuggle. Some years back, we had to reduce the rent to get tents into properties considerably. Previously interest rates have been high, as much as 12%. At this stage in the real estate cycle, it’s an opportunity for landlords to take advantage of situations now. Real estate moves in cycles, and it’s possible that rents will need to come back down sometime in the future.
