Risks of investing in rental real estate property are big, however, they are manageable.
There are many different types of investments in the real estate market. One of the most popular kinds is investing in rental real estate property. So, it is no surprise there are risks related to this type of investing. After all, there is no investing possibility that is absolutely bulletproof. The good thing is that all risks related to investing in rental real estate can be avoided with good planning and preparation.
Why is investing in rental real estate so attractive to investors?
For starters, unlike other investments, it provides an immediate return. Thus, you are able to reap the benefits almost immediately after you put up the money for the chosen property. Truly, who doesn’t like passive income? In addition to all these benefits, this type of investment might be the least risky out of all the other real estate property investments.
Airbnb is an app that can help you rent your property, but it is mostly used for short term rentals. Alt text: A cell phone with the Airbnb logo on its screen.
Risks related to investing in rental real estate
The benefits of being a landlord are great. However, the risks can easily crush all the mentioned rewards for rental property owners. Here are the most common and the biggest risks linked to rental properties. Before you buy a rental property, get familiar with these risks. Likewise, get acquainted with all different rental property types.
Poor choice of location
Choosing a great location for your rental property can make or break your investment. It is no secret that choosing a proper location is important in any investment related to real estate. If you look at tips for real estate buyers and sellers, this is always one of the main concerns.
For example, buying a property in a neighborhood where the crime rates are higher might seem like a good idea since the property prices are lower. Also, in this type of neighborhoods, people are more willing to rent a property, as opposed to buying. Yet, because of the instability of the area, your property can experience vandalism or robbery. Consequently, you might end up experiencing a negative money flow.
With every investment, there is a possibility of loss. Risks are always linked to investing.
Real estate market economy
For those that are looking to become real estate investors or landlords, it is very important to understand the real estate market dynamics. You need to know what influences that market. Also, the long-term forecast is very important. If you aren’t able to predict what the market will dictate in the future, it is very likely you can get stuck with a bad investment. What you can do is read real estate blogs, to stay up to date. Not to mention, it is always smart to hire a professional consultant to help you make a proper decision. Especially if you are new to the real estate game.
Negative cash flow
When you become a landlord, your main concern is not the amount of rent that you collect every month. What you are concerned about is having positive cash flow. Once you subtract all expenses from collected rent, you will have a clearer picture of how your business investment is going. Investing in rental real estate property is only lucrative if your cash flow is positive. Hence, you are making money. If your cash flow becomes negative, you have a reason to be truly concerned.
How to avoid a negative cash flow?
Before you determine the amount that you will be charging your tenants, you first must calculate all of your costs. Therefore, you must put together your property taxes, mortgage payments, maintenance fees, insurance bills, etc. Also, to this list, you want to add a little extra money. This extra addition to your costs is not to be a jerk and rip off your tenants. This extra cash is meant to cover any unforeseen issues. For example, some appliances need to be fixed, a window needs to be replaced, etc. Only once you have that amount figured out can you determine the rent amount. Otherwise, very soon, you can enter the negative cash flow stratosphere and then you are in deep problems.
Sometimes, it is better to have no tenants at all than to have those that are bad for your property. Surely, every landlord dreams of having tenants who pay their rent on time and take care of their rental property. Unfortunately, this is not always the case. Thus, be very careful when choosing tenants. Regardless of their bad behavior, once they are on your property it takes time and money to get rid of them. Eviction is not an easy process and it costs money.
Be careful when letting tenants in your property, because eviction takes a lot of time and there are legal bills associated with it.
However, if you are careful in choosing tenants, it is very likely you will have a good experience. For tenants that are moving from far away, offer some advice. Convince them to let professionals handle long distance relocation projects. That way they can move in smoothly and have a fresh start. The happier your tenants are, the better they will take care of your property.
In the end, it is clear that investing in rental real estate property can be a great choice. However, there is no room to be too relaxed and casual in managing this process. You always have to choose tenants properly and manage your investment wisely.
Jack Lutz is a long-time real estate expert. For the past two decades, Jack has worked for a large real estate company and he is an expert when it comes to investing in rental real estate. Currently, he lives in Brooklyn with his stay at home wife and two daughters. On the weekends, he prefers to spend time with his family, since on workdays he works long hours. Jack’s plan is to invest in rental real estate and retire early.