How To Make Profits By Renting

If you have ever considered purchasing a single family residence for the purpose of renting, you have more than likely heard from others how profitable it can be. But investing in real estate can also be very scary. As a real estate investor and a property manager operating in the northeastern Ohio cities of Cleveland, Akron, Canton and Youngstown, I have found there two variables under your control which impact profits more than others. The first variable, your initial investment, is something everyone considers and I won’t spend too much time discussing since everyone seems to understand the “buy low” concept. But the second variable, your property management expenses, is generally underestimated by numerous investors.

Property management expenses can mean different things to different investors. However, most investors can agree on the 50% rule. The 50% rule states that, over time, the expenses on a property will equal about 50% of the income. Now it doesn’t matter if you manage your investments yourself or if you hire a professional to manage them for you. If you allow expenses to creep to say 55%-60% or even higher, you are on a clear path towards big losses for your investment.

Let’s look at a typical sweet spot for the rental market in Cleveland. You own a well maintained property in a middle class neighborhood in Cleveland, OH. The house is 1200 square feet, it has three bedrooms and 1.5 baths. For the sake of argument, let’s say the rental market determines it will bring a rent of $1000 per month or $12,000 per year. Take a look at the following table for one year’s worth of expenses with a great tenant.

Property Management Expenses (Great Tenant)

  • Water/Sewer - $200/year
  • Garbage - $200/year
  • Utilities - $200/year
  • Insurance - $900/year
  • Major Repair - $1000/year
  • Maintenance - $500/year
  • Vacancies - $0/year
  • Evictions - $0/year

Your yearly income is $12,000 since you have collected $1,000 per month for 12 months and, according to this table, your expenses for this year would be $3,000 or 25% of your total income. Notice you incurred $0 for vacancies and evictions. Your good tenants paid their rent on time, every month. It is definitely a good year for any landlord.

But look what happens to your expenses if you have a bad tenant where you must evict them, repair your property and loose rent due to vacancy during the repair.

Property Management Expenses (Bad Tenant)

  • Water/Sewer - $200/year
  • Garbage - $200/year
  • Utilities - $200/year
  • Insurance - $900/year
  • Major Repair - $4000/year
  • Maintenance - $500/year
  • Vacancies - $2000/year
  • Evictions - $500/year

Your yearly income fell to $10,000 since your bad tenant only paid for ten months’ worth of rent. Your bad tenants also damaged all of your carpeting and trashed your appliances. All of which needs to be replaced at a cost of $3,000 to you. Finally, your legal fees for the eviction were $500. Your expenses for this year were $8,500 or 85% of your total income. It was a very bad year and a few years like this one in succession will send you packing.

The morale of the story? Learning to tell the difference between a good tenant and a bad tenant before they move in is crucial to your success. My advice to you if you feel good about your instincts: Screen, screen, screen. Otherwise, hire a professional who looks at thousands of applicants each year to help you.

All County® NEO Property Management property managers are licensed real estate agents, members of the National Association of Residential Property Managers, Ohio Association of Realtors and the North East Ohio Regional Realtors Association. Our team of professionals offer unparalleled rental property management services in the following areas: Cleveland, Akron, Canton, Youngstown and their surrounding communities.