Why is it a priority to hire a team proficient in investment acquisitions, rentals and property management of bulk properties when purchasing a large volume of rental properties?
Many are seeking new ways to invest in this economy. Purchasing rental properties and retaining them for future appreciation is becoming a top choice for many investors.
However, there are several risky mistakes investors can make which can greatly impact their returns.
Mistake #1 when buying bulk properties for investment: Not analyzing and researching the specific market and investment to determine a template of a property type to buy. Many investors leave this opinion up to their real estate sales agent who is compensated on these transactions with sales commissions.
Template to include:
- Researching the metro area to insure industry is strong to offer solid renters with jobs and suitable income.
- Also, setting a radius of distance in choosing the properties, to assist in practical access for property management.
- Determine the purchase price to the rental income rate the home or townhome can retain. Why buy a property for $300,000 that will only retain a monthly rental income of $1,000?
Mistake #2 when buying bulk properties for investment: Not acquiring a management and leasing team with experience in overseeing a portfolio with a track record of good returns. Many times an investor will allow the realtor that sold them the property to rent it and manage it for them. This leads to improper tenant screening, improper management of the property with unnecessary costs incurred, improper rental pricing and renewals, no knowledge of landlord/tenant laws leading to loss of rents over a long period. Why would you hire an attorney who specializes in divorce to assist on a case in construction dispute? So why would an investor expect a real estate sales specialist to be proficient in leasing and/or property management? This is the crucial time where an investor may have made a great buy but will quickly see a major decrease in their anticipated return on the investment.
One example would be an investor who recently purchased about 100 properties in one county.
Portfolio of properties purchased: 78 condos in fractured developments, 15 individual apartment units and 7 single family homes.
The radius of the county where the properties were purchased was 50 miles to the east and west and 75 miles from the north to south. The purchases were spread from one corner to the opposite, quite a distance apart. This leads to an inability to properly and effectively manage.
The condo purchases in fractured developments lead to unexpected community assessments and fees for the investor. The condos required a large move in deposit from renters. This meant additional month’s security deposit required to be held by the association, which caused longer periods of vacancy loss while waiting to acquire renters who could afford 4 month’s rent to move in. A fee-simple purchase of smaller apartment buildings and single family properties would alleviate these assessments and required items, due to no condo or HOA rules.
The realtor who sold the investor the 100 properties assisted in the rentals. They did not properly screen the prospective renters and within the first six months 25% of the tenants were late on rental payments and 5% were in eviction.
Property Management challenges also included overseeing with 100 different renters, properties, maintenance calls, 31 different owners calling with questions on their properties, payments and reserve accounts. This is an example of poor customer service for both the renters and property owners.
Other issues: Improper property management software, unqualified property management staffing, including maintenance, lack of procedures and policies, rental leases improperly drafted, unlicensed, uninsured vendors working on properties, etc.
All of the above items are easily rectified with qualified management experts, along with experienced leasing specialists. In addition, proper tenant screening by a separate entity is imperative and one that is not compensated based on the tenant acceptance or rejection.
Because of the lack of quality property management and leasing the investor saw a return of 5% on their investment instead of 13% as did with another similar project, an 8% unnecessary loss.
