The No. 1 Reason Why Real Estate Investments Fail to Generate Returns

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MACK Companies, the Midwest’s largest owner of single-family investment properties, explains why most investors lose money on their real estate investments.

MACK Companies is the premier provider of AAA+ single-family real estate investments

A single-family home real estate investment property from MACK Companies

Without great property management you won’t have great tenants. And great tenants are the key to a successful real estate investment.

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According to a recent Morgan Stanley Housing Market Insights report, the U.S. is turning from a homeownership society into a rentership society. And as the number of renters increases, so too, does the number of real estate investors who are purchasing rental properties. However, not all real estate investors will see positive returns in their real estate investments.

Some investors may say their real estate investments failed because their property’s location was bad or their tenants didn’t pay their rent on time. But, according to James McClelland, CEO and president of MACK Companies, the nation’s premier provider of single-family, AAA+ investment properties, the No. 1 reason why people fail at real estate investing is property management.

“There is a misconception that people fail in their real estate investments because they didn’t buy the right property or it wasn’t in the right location,” said McClelland. “Of course, those factors come into play. However, when it comes right down to it, the inability to analyze one’s property and manage it correctly is what precipitates failure.

“Brick and mortar never make mistakes,” continued McClelland. “What did that home sitting on its lot ever do wrong? Nothing. The property failed because of the person who was managing it, or better yet, mismanaging it.”

As the largest owner of single-family investment properties in the Midwest, MACK Companies is well-versed in property management. The firm currently manages approximately 570 single-family rentals, of which it owns 370 of those properties. It manages the other 200 single-family homes for real estate investors who purchased the homes through MACK Companies

“For many considering real estate investments, property management is an afterthought. Or, they think ‘hey, I’m handy, I can fix a leaky faucet’ and then assume their responsibility and interaction with a tenant will be minimal,” said McClelland. “But to be a successful real estate investor, property management has to be a priority. Without great property management you won’t have great tenants. And great tenants are the key to a successful real estate investment.”

How to Properly Screen Rental Tenants
According to McClelland, one of the first missteps people make with their real estate investments is not properly screening their tenants. A detailed screening should include:

  •     A credit check
  •     Interview their current landlord
  •     Visit their existing home. How they maintain their current residence is indicative of how they will likely maintain your property.
  •     Talk to their employer regarding their prospect for long-term employment
  •     Perform a skip trace
  •     A criminal background check

Introduce Tenants to Their Home
On tenant move-in day, McClelland advises investors to perform the following indoctrination:

  •     Introduce the tenant to the home and immediate area/conveniences
  •     Give the tenant a housewarming gift
  •     Provide tips on basic care and upkeep of appliances and equipment, such as the HVAC.

“We want our tenants to feel comfortable because we want them to stay for a long time as long-term renters are typically the best tenants,” said McClelland. “Our average tenant stays at the property for 4.8 years.”

How to Collect Rent
According to McClelland, another misstep real estate investors often make is in rent collection. While there are many options to collect rent, MACK Companies’ property managers physically go to each unit on a monthly basis to collect rent and conduct a site survey to verify condition and upkeep of the property.

“Does collecting rent in person for almost 600 properties take time? Absolutely,” said McClelland. “But you know what takes more time? Finding great renters. Or making costly repairs to the property because you haven’t checked on the tenant in weeks and then come to find the property poorly maintained.”

How to Protect Your real estate investments
“Sooner or later, property investors realize that owning real estate without having someone else manage it for them becomes a full-time job,” McClelland said. “For us, it’s a 24/7 job 365 days a year. And that’s what good, paying tenants want – a property management firm who can solve problems quickly.”

Too often, real estate investors who decide to manage their own property live too far away from their investment to properly manage it, noted McClelland. “How can you effectively protect your investment and renter if it takes you more than an hour to get there if something goes wrong? You, or your property management firm, should be located no more than 30 minutes away from your investment property,” he said.

According to reports, there are now more than 3.5 million single-family rentals in the U.S. and that number is growing due to rental demand and foreclosures. “There’s no denying rental properties are one of smartest additions to an investment portfolio right now,” said McClelland. “But how you choose to manage those assets can make the difference between enjoying a positive monthly cash flow and not covering your mortgage.”

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Kim Manning
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