Your Chico rental property may have seemed like a good idea when you bought it, but now you’re having doubts. Did you really prepare for this? Should you sell it? Should you rehab/update? What to do?
If you find yourself in the position of needing answers, start first with these five questions.
Can I withstand a vacancy?
A vacancy can put a major damper on your investments. If you own one single Chico rental property, then having it stand empty is a 100% loss of cash flow for you. Even having one unit in an apartment building vacant can be a problem for cash flow.
The best investors plan ahead for vacancies because they do happen. Rather than wait for it, hoping it never comes, good investors make sure they have a plan for when this happens. When you bought the rental property, you should have budgeted in a “vacancy factor” to make sure you can still make money even with a 5% vacancy rate, for example. (Substitute in the current vacancy rate, plus a small buffer.) Did you? If not, you can still take steps to minimize vacancies, like addressing tenant concerns promptly and effectively, making sure your property is competitive with other rentals out there, having masterful marketing ready to go so as to minimize time between turnovers, etc.
What if I find major repairs?
A Chico rental property may look great at first glance, but when you peel back the wallpaper and look underneath the floorboards, you may have another story lurking there. Even if you had an inspection done, there still could very well be repairs that are needed but were missed, so hopefully you didn’t spend all your cash on the down payment, and you set aside some to repair/improve the property once escrow closed. If the property was occupied when you bought it, be sure to do another very thorough inspection when it becomes vacant at some point.
Other repairs arise as elements of the structure or equipment fail. The siding may start to dry rot in places, the water heater may fail, and the roof will wear out at some point. To protect against getting blindsided by costly repairs, every month make sure you set aside reserve funds of at least $150-200 per door (maybe even more with an older home). Tempting as it might be to use these funds for another purpose, DON’T TOUCH THEM except for repairs. You should also routinely inspect your Chico rental property to make sure everything is in good condition.
How can I hold a bad tenant accountable?
You’ve just had a new tenant sign a lease with you, and a month later, the property has some major damages. The carpets have some awful stains on them, there are holes in the dry wall, and the lawn looks like it hasn’t gotten any love at all. It isn’t always easy to hold a bad tenant accountable for damage to your property, other than withholding part or all of the security deposit. Just try to legally get them out as quickly as possible, get in there to do repairs, and then (having learned your lesson) get a good quality tenant in there ASAP. You can also connect with collections agencies to try to recover monies if the damage exceeds the amount of their security deposit, though the success of collections agencies is low, at least based on my personal experience.
With regard to getting a good quality tenant in there: Work with a reputable property management firm, but if you are going to go it alone, institute an application process that weeds out bad tenants. How to do so is beyond the scope of this article, but don’t neglect your research into this area–it can make or break your experience as a Chico rental property owner.
What if the weather causes problems?
Extreme weather can wreak havoc on your property, whether it’s hail damage to the roof, a tree falling through the living room, or..? The best thing you can do is make sure that you have enough homeowners insurance to cover the damages. And if you live in any flood zone other than “X”, get flood insurance coverage. Hopefully, you will never have to make use of it and can complain about all that “wasted money” for years to come, but you will be SO GLAD you had it if you do need to make use of it. Make sure you do your research to thoroughly understand what your policy will cover. And, although not weather related, don’t skimp on your property’s liability coverage. Again, this can break you if you need it but don’t have enough of it.
What if market rents drop?
Sometimes (but rarely) Chico rents fluctuate downward slightly for a brief time. In order to stay competitive, you will need to adjust your rent price as well as your expenses if this happens. If something causes substantial change in rents, like the State of California mandating a 25% rent reduction across the board (which has been considered in the legislature), then you have some tough choices to make. Perhaps you are fortunate enough to be able to eat this kind of reduction and still operate the property. But you may also consider selling. If you have owned the property for at least 2 years, maybe you can do a 1031 exchange into another property where the numbers make more sense.