Beware of the Traps of Rental Property Ownership

When you first embarked upon the journey of owning apartments, your initial focus was probably from that of an investor.

In all likelihood, your goals were those of wealth-building and achieving financial security. Some investors see this process as following the real estate market and buying or selling to leverage the trends. Others take advantage of the 1031 exchange rules to trade up into larger properties or more units through multiple properties.

In some instances, either out of necessity or to maintain control, purchasers also become involved in the day-to-day operations. They take on the responsibility for collecting the rents and for overseeing repairs. Sometimes they become the onsite handyman, tackling minor fixes themselves. Many also undertake the periodic chore of getting vacant units repainted and rent-ready.

Hands-on ownership has advantages as well as disadvantages. In today’s world, owners who handle all aspects of operations need to work extra hard to keep abreast of all the ordinances and legalities that impact everything from raising rents and selecting new residents to accessibility issues and, even, replacing refrigerants in air conditioners.

More often, than not, hands-on owners also become tied to their properties. They find themselves less able to delegate either from a personal perspective or a financial one. Because they are at their properties so frequently, they form closer relationships with their residents, which may impede their ability to raise rents or enforce payment due dates. That’s a trap that can lead into a downward spiral.

Another potential issue faced by hands-on owners is what happens when they are no longer willing or able to continue handling the day-to-day operations. Who will take over? Does the property generate sufficient income to cover the cost of professional management? What types of preparations have been made in terms of legacy training and involving their heirs? Have they been kept informed? Do their heirs have the desire, time, and ability to help? Or are they just waiting to sell?

The above are tough questions. However, as has often been previously stated in this column, talking with and really listening to one’s heirs is a task that should not be ignored.

Also, it is not just hands-on owners who fall into traps.

Some investors become complacent. They have owned their properties for many, many years and those properties are generating a good cash-flow. They’ve watched values double and, even, triple — not once but several times. Even if there is a drop in values, they feel comfortable.

What these investors often forget to consider is the fact that the properties, themselves, and the neighborhoods in which they are located, are aging. Eventually physical deterioration will

BY SONYA LOERA

erode the values gained. This all happens very slowly so it is rarely obvious.

Even more critically, very few investors maintain the types of reserves needed to make major capital improvements. Roof replacements are a prime example. All too often, owners opt for fixes rather than replacing an entire roof. That approach can work for a while. However, at some point, the cost of repairs becomes prohibitive.

All owners, whether hands-on or just investors, need to pay attention and plan three, four or even five years ahead for big-ticket expenses such as roof replacements, replacing air conditioning units and resurfacing driveways and decks. Even repainting the exterior of a building can be expensive.

Occasionally, an owner/investor becomes obsessed with a certain goal, such as paying off an existing loan. Owning a property “free-and-clear” may not always be the right answer. Sometimes re-financing or a taking out an additional loan for updating a property may not only slow down physical obsolescence, but it helps to attract a better quality of resident and, to the extent allowable, maximize rents.

Updates and upgrades also enhance values and impact prices, particularly as the market tightens. In a more competitive marketplace, investors look at all the details, including how well a property has been maintained and how that property compares to available options.

Traps — continued on page 22