Property Management Myths, How to Avoid Them and Set the Right Investment Priorities as a Landlord

So Far in 2024 we Have Gotten Immense Push Back on Reducing Rental Rates

Especially when it’s below past leases. The market doesn’t care what you used to get, and it’s well documented in ever major city that we cover rents have fallen. Rents are down 10% in Raleigh which is truly incredible on such a large scale. We predicted that for our rental homes because they’re higher-end, but we were very surprised to see such a wide-scale decline in a city that is well-documented to be doing well.

A lower rental rate will attract lower-quality tenants: FALSE

Great residents have great finances for a reason, they find value. Poor tenants have no chance of securing the best rentals and wind up with the highest-priced listings most of the time because those homes sit empty for 3 months and the owner gets desperate and then decides to take anything they can get if it’s at that rate they think they deserve.

A higher rental rate guarantees I earn more money at year-end: FALSE

It’s well known in economics that there is a price equilibrium and if you are too aggressive you won’t move your product, which for many landlords takes much more out of their pocket at year end.

A lower rental rate is money down the drain: FALSE

We outline details below, but accepting slightly below market rates is one of the single best ideas for many landlords as that usually diminishes all problems and headaches dramatically. Over the long run, that strategy is usually much more profitable let alone enjoyable.

Watching expenses or top-line rental rates is the best way to ensure success: FALSE

DID YOU KNOW that our average landlord loses more money to vacancy every year than they spend on total repair costs? That’s despite the fact we constantly espouse the same points you read in this article. Most owners lose 2 to 3 times their repair costs in vacancy every year while their home sits empty producing nothing but higher flood and damage potential.

Watching expenses or top-line rental rates is the best way to ensure success: FALSE

DID YOU KNOW that our average landlord loses more money to vacancy every year than they spend on total repair costs? That’s despite the fact we constantly espouse the same points you read in this article. Most owners lose 2 to 3 times their repair costs in vacancy every year while their home sits empty producing nothing but higher flood and damage potential.

My home isn’t renting in June, but I should have better luck in July or August. FALSE

June is the peak of the market year after year. Rents typically fall 10% in our markets from July 4 through the end of August. If your home isn’t renting at a certain price in June, you are ignoring long-known industry norms if you expect to do better later in the year.

Most owners suffer much more from repair costs and inflation than the cost of a vacant property: FALSE

Our average owner has revenue of $20k a year, on $2k in repair costs. That same owner loses $1600 if they let their home sit vacant for just 30 days which is usually the minimum loss for landlords who do not take our pricing advice.

Inflation is a major problem for landlords: FALSE

Increasing rental rates have been one of the primary drivers of inflation. The FED frequently cites that fact in their meetings. If you are a landlord (especially with a sub 4% mortgage), at least in that context you benefit when inflation goes up because your rent income has gone up more than almost anything else. Unless you personally spend lavishly or haven’t been a landlord long, inflation has likely contributed quite a bit to your wealth. You would never know that talking to landlords.

Stubbornly High Rents Prevent Fed From Finishing Inflation Fight

https://www.wsj.com/economy/housing/fed-inflation-rate-housing-rentals-2f28c5ba

Rents are so high, that owners often cost themselves a fortune trying to save pennies on repairs that delay the flow of huge rents, or worse attract low-quality renters.

If I stay ultra disciplined about dramatically prioritizing tenant quality, and minimizing vacancy, even if I have to cut my asking price quite a bit to do so, I will be significantly happier, wealthier, and have provided a greater service to society in the vast majority of cases: TRUE

Seasonal Shifts Have Huge Impacts on the Bottom Line for Rental Investors, Respect Them

As a company that manages a lot of homes, we have to play the odds a bit. Yes, some properties may do well after a major seasonal shift, but that can be very hard to foresee, even for someone with 20 years of experience.

One major seasonal shift is just before Christmas, and the other is just before the 4th of July.

Therefore we always encourage all of our owners to focus on two major inflection points in the market to “play the odds” and make sure that a good year doesn’t turn into a marginal one over $50-100 a month on the asking rate. Every year we see a few owners play with fire, keep the rate too high against our advice, then chase the market down through all of July and August before finally ending up with a rate that is 10% lower than we could have gotten in June, with 90 days of lost rent.

Despite Interest Rates Nearly Doubling, and Falling Rents Being Well Publicized, Many Landlords Will Not Accept Lower Rents Even As Vacancy Costs Rack Up

Rental owners are not handling a slowing market well, particularly if that means listing their home at a slightly lower rate than they were getting.

That is a classic and huge mistake. Leaving your home vacant at an average cost of $60 a day (in our markets), just to avoid reducing $1200 a year is almost always a costly decision. We’re often only $50-150 away from the market rate. For most of our homes that is a zero-sum game, if they’re lucky. They hold out for $2000 a year more on the rental rate, but let their $2000 a month rental sit empty for 30 days more than it needed to. Zero earned.

That’s a minor problem though. The much bigger problem as we noted is that often they do this at the worst possible time (now right before July 4th), only to end up reducing plus eating months of vacancy that easily could have been avoided.

Contrary to a common myth that lower rental rates attract low-quality renters, it is literally the complete opposite. High-quality renters have great finances and credit for a reason. They find value, they are smart about timing, they never overpay unless something is very special or rare, and they know when an owner is asking too much or there is a value in front of them. They are smart, savvy, and responsive.

Nothing in Rental Management is More Important Than Who You Put in Your Rental

On the other hand, low-quality renters won’t even receive a response on a high-value rental listing because they get flooded out by the quality responses. Those homes rent fast and they never have a chance. They then naturally turn to the properties that have been sitting on the market for a while, the ones that aren’t flooded with high-quality inquiries, and that have often been sitting on the market for months leaving the owner desperate and worried. Low-quality renters intuitively know that makes them vulnerable to making bad tenant decisions. It rarely fails to be honest. Holding out for too high of a rate in most cases equates to…

Dramatically higher vacancy, and therefore the holy grail of rental investment measurement “net operating income” takes a huge hit.
Lower quality renters
Lower rental rate
More turnover
More maintenance (low-quality renters guarantee this)
And a ton more headaches

That’s a bottom-line fact and there are not many that escape that outcome once they fall into this trap.

Why does this happen? A lot of it is pride. Going backward is not easy to digest. These are investments and their performance does affect us emotionally. Rental rate is always the most obvious metric, but the trap is that it’s also very close to the least important. That makes sense right? We see it with companies too. They make a ton of money, grow like crazy, then go bankrupt. It’s because they were focusing on the top-line rate, not the bottom-line profit.

Our company is flat-out obsessed with bottom-line profit because similar to the concepts in the famous movie Money Ball, nothing else matters that doesn’t maximize that one metric over the long term, simple as that. The rental rate is a huge distraction and plays only a minor role in your final performance, the performance you should be staking your pride on.

It is crucial to understand that rent and vacancy are two sides of the same coin. If an owner doesn’t earn that $100 a month premium on their rental listing this year ($1200 value) but were able to rent the home just 25 days faster, using the approximate average rental rate in our markets they actually make a lot more money mathematically.

Net Operating Income

If investors are going to tie their pride to a rental priority then focus on net annual income, aka bottom-line take-home profit. That’s the thing to be proud of. After one year, what do I have to show for my efforts and risks taken? If a home sits empty for 6 months the best one can show for their efforts will be derived from half a year of top-line revenue which is the bulk of what the investment produces. A surprising number of owners see nothing wrong with 3 months vacancy, 24% of the year’s revenue, and they usually accrue higher expenses like utilities.

One month’s lost rent is usually much more than a $100 above-market rent premium, but most homes will not rent $100 above market and if they do it’s surely to a subpar risk.

Every vacant month is equal to about 8% less top-line revenue than you would have if producing rent.

Companies who have a poor product often make a similar mistake. They keep the price too high, and sales, but especially the bottom line, suffer much more than if they took the optimum pricing route. All the while their costs keep coming.

All those rising expenses landlords love to complain about nonstop these days, usually don’t exceed one month’s rent or vacancy.

That’s a crucial statement. For most of our owners, their entire repair and expense cost over 12 months is usually equal to keeping their property overpriced by a small amount for 30 days.

So when owners spend a huge amount of time and effort scrutinizing every cost while whistling past a 16% loss in revenue due to reaching for a slightly higher rate usually due to pride, they are making a massive mistake, and here are more reasons why.

Lower rents attract highly quality tenants. It is why they have great finances, they make smart decisions and find value.
Vacant homes have shockingly high repair costs. It’s a well-known phenomenon in our industry. The risk of massive issues such as floods increases dramatically as well. We call vacant homes a ticking time bomb of some sort, and we highlighted this philosophy when we had almost no homes on the market when COVID lockdowns began.

Paying a slightly higher price for repairs if it gets the job done better and faster for a great resident is not a negative. As long as repair bills are reasonable and done with those other two points in mind, they shave pennies off their net annual expenses, often while frustrating their resident or while the home sits empty and costs them nearly $100 a day to do so.

Non-value seeking lower-quality tenants who have no chance at securing the best rentals increase maintenance dramatically, but they also cause vacancy in the form of lease breaks, poor housekeeping making it impossible to show while occupied, just being a pain and dragging everything out, and much more. That’s how it works for them, if I’m going to overpay I am going to get mine. Same if you refuse to do reasonable repairs.

What we are outlining here is the single biggest reason landlords regret becoming one. Avoid this trap and things almost always go much more smoothly.

Finally, this is likely to be a very busy hurricane season and it is very comforting to know that income is flowing. After all, vacant or not those huge insurance bills and mortgages keep accruing. As do most other costs which is why vacancy is so brutal for rental investors.

This will be particularly true of owners who think that their home that isn’t renting in the peak annual month of June, will have any serious chance of renting for that same rate in late July and August. It never happens on a general scale and rarely at the property level.

Vacancy is insedious and rarely has any benefit whatsoever, a lower rate has a lot of great side effects.

Priotizing rate over resident quality first, then vacancy is the single biggest mistake US landlords make, year in and year out. Avoid it and be happier and more profitable almost every time.