You bought a rental property in Richmond because you wanted to generate profits via passive income. Now that you have it and found some tenants, you realize it isn’t generating as good of profits as you had predicted.
Why could this be?
You’re attentive to your tenants, you tend to the property when needed, and you spend a good chunk of time and hard work maintaining it. So, why do you see low or negative cashflow?
By the end of this article, you will know six main reasons why your rental property in Richmond isn’t generating the profits you had expected.
How Much Profit Should Your Rental Property be Making?
This isn’t as straightforward a question as you may think. There are a lot of factors, and it depends on your individual situation.
Generally, one investment rental property generates a couple of hundred dollars a month in profits. Although, you can calculate your cap rate reasonably easily.
To do this, calculate your net operating income (NOI). Simply subtract your annual expenses without the mortgage from the annual rental income.
Annual rental income – Annual Expenses (without mortgage) = NOI
Then, divide your NOI by how much you purchased the property for and multiply by 100.
(NOI/Purchase price) x 100 = Cap Rate
This percentage is the highest percentage you can make in profit from your property.
To give you some perspective, an annual stock market return is about 8%, while bonds return approximately 3%.
To Calculate Cashflow
Now that you have an idea of what your cap rate is, now it’s time to see how much cash you can expect to generate right now.
The formula is simple yet again.
Annual Rent Income – Annual Expenses – Annual Mortgage Payments = Annual Cashflow
To see how much profit you’ll make monthly, divide the annual cash flow by 12.
Why the Property Isn’t Generating Good Profits
Now that you know your cap rate and cash flow, you can compare the two and analyze them. Is your cashflow much lower than the cap rate? Do you see negative cash flow from your property in Richmond?
We’re going to dive into six common reasons why your property isn’t generating significant profits so you can make the necessary adjustments and increase your profits.
1. The Rent is Priced Too Low
When you advertised your rental property, did you find tenants to lease it to within a couple of days? Did you receive a lot of interest when you first listed it? Then you may have set the rent too low.
Setting the rent too low means you’re missing out on more profit. All you have to do is raise the rent.
Before advertising the property, check the local rental market to see how comparable properties are priced. You want to keep up with the competition in the market by setting the price just right.
2. Your Expenses Are Too High
You may be spending too much on expenses each month keeping up with the property. Whether it’s the property tax, water bill, insurance, or routine maintenance, you should try to find expenses to cut out.
Some landlords choose to give the responsibility of all utilities, including water and trash removal, to the tenants. Take a close look at how much you’re paying for specific services and find a way to decrease these expenses.
3. Late Paying Tenants
Do you have to chase down your tenants each month for their rent? If so, they could be negatively affecting your Richmond rental property’s profits.
Even just one missed month of paying rent can set you back hundreds, if not thousands, of dollars. Just because your tenants didn’t pay their rent or are late doesn’t mean your expenses won’t need to be paid.
To avoid dealing with late-paying tenants, make sure to have a thorough tenant screening process. This provides you an insight into their finances, previous rental history, and more. Therefore, decreasing your chances of having tenants who don’t pay their rent on time.
4. Poor Condition of the Property
If you’re always fixing something in your property, it could be a reason it isn’t generating good profits. These repairs are actually costing you money!
With each unexpected repair made, you’re adding more to your monthly expenses, which decreases your monthly profits.
Another reason your property’s poor condition isn’t helping generate good profits is that you may have the rent at a low price. With outdated properties, landlords can’t ask for a higher rent because it would stay vacant.
One way to fix this is to update your property and make permanent home improvement repairs where needed. While this does require some upfront costs, it will increase your profits over time.
5. You’re Self-Managing the Property
Do you self-manage your rental properties in Richmond? It could actually be a reason why your property isn’t generating good profits. Without professional resources and specific industry knowledge, you could be wasting time and money.
6. You Don’t Retain Tenants
Did you know it actually costs more to acquire new tenants than to retain current ones? If your rental property experiences high tenant turnover, it could affect your rental property profits.
In fact, it’s actually easier to retain current tenants than acquire new ones. 60-70% of your current tenants are more likely to renew their lease, while a new tenant is only 5-20% likely to sign a new lease.
These marketing and acquisition costs can really eat into the annual profits you were expecting to make. From paying to list the property online to spending time and money showing the property to potential tenants, you’re putting a dent in your revenue.
Hire a Property Management Company to Maximize Your Rental Property Profits
If you have a rental property in Richmond and aren’t making the profits you expected, Hylton & Company can help you get more out of your investment.
A full-service property management company, we professionally manage and take care of your real estate investment, so you don’t have to worry. From acquiring new tenants to maintaining the property and zero upfront costs, you’ll see an increase in profits sooner rather than later.
Contact us and speak to one of our experienced team members about how we can help you make more out of your real estate investment today.