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Real estate investors are well aware that rental properties can be a substantial source of income, which is why they remain one of the most significant ventures today.
However, property management responsibilities are not easy, and anything short of efficiency can lead to financial losses. So, what are the potential reasons that cause property owners to lose income?
Key Highlights
- Evaluate the effectiveness of your property management from marketing to maintenance, as these can lead to more expenses and vacancies, and therefore a lack of profit.
- Take note of all the tax deductions you may be eligible for, such as mortgage interests, depreciation, maintenance and repair costs, property management fees, and more.
- When you find your rental property's income is suffering despite your efforts, the next best thing to do is hire a real estate professional to deal with management duties.
- Some factors are within your control, such as rent price, property maintenance, marketing efforts, and leasing strategies, while others are not, such as market conditions and rental demand.
1. Poor Marketing Efforts
An investment property relies on effective marketing to attract tenants. To maximize your occupancy rates, you must create a compelling listing, utilize all listing platforms, and post on social media.
Many potential tenants now resort to checking online platforms, so if you're not sure how to optimize your listing to maximize visibility, you can hire real estate professionals, who are knowledgeable about the rental market, to do it for you.
2. Mismanaging Passive Losses
Passive losses can offer tax benefits for real estate investors, but they must be managed carefully to ensure that passive loss rules do not limit their benefits. Furthermore, they must understand the difference between passive and active income and how it affects their tax liability.
A pass-through entity, such as a limited liability company (LLC) or a sole proprietorship, can help you manage your passive losses and minimize your tax liability. Actively participating in rental activities can help you make deductions on your overall expenses when you pay taxes.
To qualify for active participation, you must have a certain level of involvement with the rental property, such as:
- Approving new tenants
- Drafting the rental agreement
- Authorizing expenses (maintenance costs, repair costs, renovations)
3. Ignoring Tax Benefits
Your rent losses might be stemming from a failure to take advantage of tax deductions. This benefit applies to your mortgage interest, rental property depreciation, repairs, maintenance, renovations, property taxes (and either state and local income taxes or sales taxes), travel expenses, advertising, and other operational costs.
This is why it may be important to hire a tax adviser to evaluate your rental income and cash flow, as well as the expenses associated with your property. The general rule of thumb in any industry is that you hire experts in the field, as their services can keep your rental property from losing money.
4. Not Setting a Fair Rent Price
Rent payments are the lifeblood of your rental real estate, which means they are crucial to achieving a positive cash flow. That, however, won't be possible if your tenants can't pay rent, pay rent late, or if you can't find tenants at all.
On one hand, you could be losing money because you set your rent price too low. Your rental income won't be able to keep up with your rental property costs. On the other hand, if the price is set way too high, tenants won’t renew their lease or won’t lease your property in the first place.
5. Lack of Maintenance
Your rental property is legally required to have a functioning HVAC, plumbing, and electrical system, which is why regular maintenance is crucial for maintaining efficient operations. Faulty systems can lead to higher bills, more management tasks, or more expensive repairs.
Leaky plumbing means more water wastage, faulty HVAC systems mean it'll have to work harder to operate, and bad wiring causes electricity to leak. These issues may seem harmless at first, but they can ultimately negatively impact your cash flow or, worse, cause harm to your tenants.
6. External Factors
Sometimes, rental income loss is completely out of your control. For example, a vacation home in Las Vegas may see a boom in business during events or summers, but you will not see the same number of tourists in colder months.
The same goes for your San Diego investment property. The rental demand may not be in your favor, seeing as there are no tenants to rent your property.
Consult a property management professional, as they will have valuable insights on how to optimize your cash flow despite challenging market conditions.
Rental Losses FAQs
Are there limits to passive losses?
- Yes. The IRS only allows deductions from passive income, such as unrelated employment to your rental property, or portfolio income, such as revenue from dividends or capital gains. However, these can be suspended losses for years until your passive income offsets the deduction.
What are the signs of income increases?
- Rental losses are pretty easy to track, which means increases can also be evident. One sure way to determine if your cash flow is improving is if you see a positive net income.
What happens if my financial losses continue?
- If your rental property continues to bleed money, it can lead to real estate loss in just a few months. Try to find other sources of money aside from your rental income, such as vending machines in your rental property or paid services, such as cleaning.
Is real estate activity considered passive activity?
- In most cases, owning a rental property and collecting rent are considered passive by the IRS.
Am I losing money with passive loss?
- Many investors believe that they are losing money, but passive loss is for tax purposes only. Depreciation is considered a non-cash expense, so it won't cost you to claim depreciation each year.
What's the best way to track cash flow?
- Most businesses use the cash method of accounting, where income is recorded when cash is received, and costs are recorded when cash is paid out. It's an easy way to track how your investment property is doing in terms of profit, without hiring an accountant.
With a Little Help from Professionals
Investing in a property is the easiest part of your venture. Making sure you profit from it, however, is an entirely different responsibility. You will need to handle rent collection, minimize expenses, maintain the property, address tenant inquiries, and more.
Let us carry the burden for you. Income Property Advisors can offer their experience and expertise to ensure tenant satisfaction, maximize rental income, and facilitate smooth business operations.
Contact us today, and we'll be there to help you achieve your investment goals.
