Bob Nelson – The Cause of a Poor-Performing Investment Property

Right now we’re going to talk about the cause of a poor-performing investment property.

Featuring:
Bob Nelson, Eugene real estate investment broker
Marcia Edwards, Eugene residential real estate broker

Marcia Edwards: We’ve been talking about the novice in investment. Let’s go the next step. Let’s say you have investment real estate and you’re going to try to make sure you have the wisdom that you need to take a look at it with a critical eye and decide whether it’s performing as it should.

Bob Nelson: Being able to identify that. It’s one thing to say, “Hey, I’m satisfied, I’m happy with it.” Now, that may be good enough. However, what should this property be doing, if in the hands of professional management, if in the hands of a person more knowledgeable, et cetera, could it be doing more? Could it be doing better? Because as it does that you will have more cashflow available to improve the property, which makes the tenant more excited.

Marcia Edwards: Well, let’s start there. Let’s talk about property management. It could be a property issue itself or it could be the management situation.

Bob Nelson: It could very well be that. In a number of instances the manager is the owner and that can be a real issue. As an example, controlling your vacancy factor. Vacancy is a period of time where the property’s not generating income. If you look at 52 weeks in a year, you could say that each week represents 2% of its income generating opportunity. So if you have a property that came vacant at the beginning of the week and you say, “Well, I’ll go in and clean it up and I’ll do such and such. Oh that’s right, there’s a football game or a basketball game this weekend, I’ll do it next weekend.” You’ve just volunteered for a 4% vacancy factor for the year.

Marcia Edwards: And self management also, I would suggest, a concern that I see often is, it’s under rented when it’s self managed because you have a sympathy bone that’s being tugged on by the tenant possibly.

Bob Nelson: Exactly. And some instances, you have tenants that are really taking good care of the property and you say, “I like them being there. They seem to like it. They’re taking good care of it. And I understand that under renting it, to a degree, reduces my exposure to repair expenses and so forth.” It can be justified.

But in so many instances it’s under rented several hundred thousand dollars. If you were to simply say, “I’m going to raise the rent to market,” if it was allowed within the, of course, the rent control restrictions, “I’m going to raise the rent a couple of hundred bucks, then I’ll just cut them a check for a couple hundred bucks as a gift.” You’re saying, “I’m not going to do that.” Well, you’re doing it by under renting.

Marcia Edwards: That’s right. The liquidity is determined by the income that you can prove. And if it’s been cut short, you’re going to short change the sale price as well.

Join Eugene, Oregon, real estate experts: Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments, and Marcia Edwards, Residential Real Estate Broker with Windermere Real Estate, daily at 5:30pm on KPNW for the “Real Estate Today” radio show.