There is no doubt that rental property investing can result in a steady stream of income. There are several benefits to buying investment properties, however, in the competitive market of real estate, not every home, apartment, or building can yield the desired success.
Like any kind of investment, there are risks involved with rental property investments, which is why landlords, whether first-time or seasoned property owners, should carefully select their strategies. Here are several ways to mitigate the common risks of rental property investing.
#1 Timing is Everything
The real estate market is booming, but as with any industry, it also has its ups and downs. The value of a properly largely depends on current economic conditions, which means that there’s no guarantee that your property will always sell at a high price tag. If you decide to sell your property down the road, you might end up with more loss than profit. The upside is that you can always generate profit through the property by leasing it.
Real estate investors should always stay up-to-date with market trends. Keeping a close eye on the market can help investors determine whether buying a piece of real estate at a certain time is a wise decision.
#2 Choose the Right Location
Location is key. Ask any real estate investor, and they will tell you that location should be your top priority when buying an investment property. In areas where there are plenty of investment properties, you will be leasing your property at a relatively low price. Similarly, in areas with limited job opportunities and a small population, you will have a more challenging time finding renters to fill your vacancies.
Moreover, while properties in locations with high crime rates tend to be more affordable, the risks of vandalism, robbery, and property damage are much higher. You might be facing thousands of dollars in repairs — not to mention the legal complications if your tenant decides to sue.
#3 Beware of Bad Tenants
Not all tenants are good for your property. Tenants are essential in any real estate investment, but getting the first tenant that expresses their interest in your home won’t guarantee a high return on investment (ROI). In some cases, getting stuck with a bad tenant would be worse than having no tenant at all.
It’s easy to define bad tenants — they’re the ones that fail to pay rent, refuse to follow the terms of the agreement, destroy the property, and much more. Eventually, these bad tenants will have to be evicted, which is always a time-consuming and expensive process. To avoid the risk of bad tenants, it’s crucial to conduct a meticulous tenant screening process. Check their rental history, credit score, employment status, criminal records, etc.
#4 Prepare Your Property for Tenants
If you can baby-proof a home, you can tenant-proof a rental property. Perfect tenants are rare, and you’ll most likely end up with “typical” tenants who will damage your property in one or two ways. They’ll stain the carpet, scruff the walls, break the windows, and so much more. Your property will face the worst if there are kids and pets on the property.
As the landlord, it’s your responsibility to tenant-proof the property before handing over the keys to the property. This could include replacing existing furniture with ones that require less care, such as switching out white sofas with faux leather couches or replacing carpeted flooring with tiles. The rule is to go for what’s easier to maintain.
#5 Don’t Go All Out on Renovations
You may want to hold off on large-scale renovations if you purchased a fixer-upper. Aside from the difficulties of acquiring permits and hiring different contractors (eg. plumbers, handymen, electricians, etc.), the costs of repairing fixer-uppers can be extremely high. If possible, avoid buying fixer-uppers and instead go for turnkey properties. These are properties that are fully renovated and can be rented out in no time, minimizing the amount of time and money you have to spend on them.
If you have already bought a fixer-upper, start with minor repairs that address important housing codes in your state, such as providing a means of egress, etc. As you generate more revenue, you can gradually tackle larger renovations. You may also consider hiring a property manager to oversee the renovation projects for you.
#6 Think Cash Flow, Not Appreciation
The most common mistake among first-time property investors is buying properties that they think will go up in value. While it’s true that properties usually appreciate, certain properties in particular neighborhoods can experience dramatic drops in value. In the Great Recession, the real estate market saw a 27.24% drop in home prices.
When deciding whether to buy an investment property, calculate your long-term income and expenses. Will you still be making money after paying for taxes, mortgage, utilities, and so on? Your investment should generate a positive cash flow. If you don’t assess the real estate market, you will be at risk of a negative cash flow.
#7 Request an Appraisal
Never invest in real estate until you’ve gotten an accurate evaluation of the rental property. Seek the expertise of professional property appraisers — they’ll let you know how much the property is worth. Without a proper appraisal, you risk buying a property that has serious structural problems that will require thousands of dollars’ worth in repairs.
As a landlord, you are obligated to repair the structural damages of the property. Your property can’t be leased until it complies with certain standards of habitability. Failure to address these issues may result in hefty penalties.
While real estate investors can never be guaranteed a consistent, 100% ROI, owning a rental property or two is a relatively lucrative investment. Successful rental property owners understand the risks associated with property investing — most of their knowledge was gained through years of making mistakes!
Before buying any property, consider the tips above. You’ll be on your way to becoming a smart real estate investor in no time.
Luxury Property Care has helped many property investors maximize their investments for years. With professional property managers by your side, we can help you mitigate risks while making the most out of your rental property. Contact us today at (561) 944-2992