Building a property empire is many people’s dream. The idea of renting out numerous properties to people who want to use them is attractive and provides you with real passive income.
However, as anyone who has tried it will tell you, things can and do go wrong.
Fortunately, this guide can provide some helpful advice. It explains why property empires get unstuck and what owners can do to recover.
Here’s everything you need to know:
Overleveraging Personal Finances
The primary reason property empires fail is that their owners decide to overleverage their finances. Instead of taking things slowly and building up over many years, they take out as many loans as they can and build huge debts.
Overleveraging personal finances isn’t usually a problem when the economy is doing well, property prices are rising, and interest rates are low. But during recessions, the situation can change. If asset prices fall, it can lead to negative equity across the board, causing extreme problems for property owners. Furthermore, interest rates can spike and other issues can enter the picture, putting pressure on personal finances.
For this reason, most property owners use business entities to protect themselves. Instead of owning their portfolio outright, they put it into a limited liability company, which takes the rap if things go wrong. This way, they can usually protect their personal finances.
If you do overleverage your personal finances while building a property empire, you can:
- Sell your underperforming assets, removing poor returns from your portfolio
- Change your income stream so you’re getting rental income from more sources and sectors
- Refinance the debt to see if you can get a better deal (often you can if you look)
Failing To Conduct Market Research
Your property empire might also fail if you neglect to do the proper market research. If you buy properties without really understanding market trends or tenant preferences, that can land you in hot water.
Market research can take time, but you can also network and discover which business models work best in your specific area. You can learn which types of properties have fewer vacancies or poor returns, so you know to avoid them.
If you’ve fallen into this trap, here’s what to do:
- Switch to high-demand areas where people are always looking for rental properties in the area
- Look for properties with strong growth potential where void periods will decrease in the future
- Use tools like Zillow to conduct market analysis before you buy so you know you’re in the right spot
Poor Property Management
Poor property management is another issue that could cause you to come unstuck in your mission to build an empire. Failing to take care of things at the ground level may lead to all sorts of problems.
For example, many property investors have inefficient tenant screening, often attracting individuals who don’t ever intend to pay.
Delayed maintenance is another issue, and can give you a poor reputation. If tenants know you won’t fix problems when they arise, they will try to spread the word and warn people off you.
If you’re in this situation, several things you can do may turn things around. These include:
- Putting in place property management software so you can stay on top of things like maintenance and other processes
- Performing regular inspections to deal with issues with tenants before they get even worse
- Using a professional property manager with experience dealing with properties and ensuring they remain well-kept
Underestimating Maintenance Costs
You can also get into trouble when building a property empire when you underestimate maintenance costs. These can eat into your margins significantly, even if the basic numbers look promising.
Unfortunately, maintenance costs are a significant chunk of rental income (and one of the reasons rents are quite high these days). Usually, these costs take up between 10% and 15% of your income over the property’s lifetime, with some years being more expensive than others.
If you’re underestimate maintenance costs and it is causing you problems now, here’s what to do:
- Upgrade elements of the home that will reduce maintenance costs where you can
- Add energy-efficient appliances with high durability to prevent replacements
- Use insurance to cover damages and other non-maintenance issues that could wipe you out finally
- Negotiate with contractors for bulk discounts on services if you manage a large portfolio
Dealing With Insurance Challenges
Another problem you will sometimes run into as a property mogul is insurance challenges. Even if you pay a premium, be honest, and have frank discussions with the insurance company, they won’t always pay out.
Unfortunately, insurance challenges can be costly. If tenants damage a property or there is fire damage, the cleanup expenses can run into the tens of thousands. As such, if the insurer doesn’t pay, then it’s a problem.
Fortunately, you can get around this issue by:
- Hiring an insurance claim attorney to investigate your case and ensure you get the best possible outcome from insurers
- Choosing your policies wisely, ensuring that they cover you completely and there aren’t ways for insurers to wriggle out of paying you
Ignoring Regulatory Issues
Many property empires also ignore regulatory issues. They continue building or operating in areas not permitted by zoning laws, leading to challenges.
Unfortunately, breaking a single regulation can lead to costly, company-wide audits, often designed to find something wrong with your approach or business mode. One offense leads to another, and ultimately, you can find yourself facing multiple charges.
Fortunately, you can deal with this issue by:
- Subscribing to industry news articles and learning as much as possible about planning and zoning laws from local government releases
- Consulting with legal experts on what you need to do to follow the law and ensure you don’t break any of the rule
- Adjust your property strategy to work with regulations
Lack Of Diversification
Lack of diversification is another trap you might fall into. Focusing on one specific property type could lead to all sorts of problems if that market decides that it is time for it to fail.
Mostly, these issues arise if you locate all your properties in a single area. The largest employer in a town could go out of business, leaving you without as many rental payments,
If you aren’t diversified right now, it should be your number one priority. Taking time out of your schedule to ensure you have properties from a broad array of niches and markets is essential.
Here’s how you can fix the problem:
- Create a more balanced portfolio that includes high-risk and low-risk options
- Look for new markets that you haven’t explored yet to see if they’re profitable
- Balance your portfolio
Lack Of Cash Flow
Finally, your property empire can get unstuck because of insufficient free cash, a rookie mistake.
When investing in property, there will be times when expenses arise or tenants miss their payments. However, you can reduce these risks substantially by following the proper strategies.
Don’t underestimate the problems that poor cash flow can cause. While theories about how much money you will take in during the future are comforting, what really matters is the actual cash in the bank.
Here’s how to ensure cash flow issues don’t derail your property empire ambitions:
- Keep track of your finances and check payments every day to ensure that tenants pay
- Build a cash buffer that can support you during periods of high expenses or fewer payments
- Tailor your rental rates to the market so people can afford to make them on time every month into your account
Tags: Property Empire
