While real estate investing can bring in some serious returns, it is not risk-free. In an effort to discuss some of the risks of investing in rental properties and ways to mitigate them, we went to the real estate investment data analysts at Mashvisor.
Here are some of the most popular and important risks that they’ve seen:
1. Buying Worse Than Expected Rental Property
Buying the right property in the right location is one of the most important factors that will determine how profitable your investment in real estate is. When you are choosing a rental property, remember that this is a business. You are not buying the home of your dreams to live there with your beloved ones. You are buying a property that will make money for you. In order to make some good profit, it is important not to overspend on this property before you even get your first tenant. Don’t get tricked by some unneeded extras while missing on major defects, and make sure you don’t buy a rental property that is more damaged than it first looks.
To avoid the risk of buying a rental property that is in a worse shape than you initially thought, get an inspection. Bringing an inspector to the property you are considering will take a few hours of your time, but this professional will discover any hidden damages or problems that you will need to fix before renting out the property.
From Rented.com: Also make sure you’re purchasing a home in an area that will be profitable as a short-term or vacation rental. Not sure if the area is right for a short-term rental?
- These are the best markets for investing in a vacation home.
- Grade your vacation home prospects here to find out how much you can expect to make on Airbnb.
- Ask the real estate analysts! Mashvisor can help you analyze specific properties for real estate investing.
2. Not Being Able to Get Tenants.
Buying a rental property does not automatically guarantee you 100% occupancy and quick profits. Once you’ve purchased a good property and prepared it for renting, you might get stuck finding tenants.
This problem can be especially risky if you’ve taken a loan from the bank to purchase the property expecting that the monthly rent will cover the mortgage payments. If you cannot find an appropriate tenant, you will have to cover the mortgage, insurance, property taxes, and other expenses from your other sources of income such as salary, savings, and other investments.
Having said that, though, don’t make the mistake of allowing just any tenant to move into your rental property because you are so desperate to get some positive cash flow. The next point discusses the risks associated with having a bad tenant.
To minimize the risk of being unable to find a good tenant, you should do your homework well before purchasing an actual rental property. Make sure you choose a property that is in high demand. Choose a location with high occupancy rates. You can always consult Mashvisor to check out vacancy rates for properties in various neighborhoods around the US.
From Rented.com: Another option is to invest in the help of a property manager. Not only do they have developed networks of guests and advanced marketing tools, they may also be able to offer you guaranteed rental income—even for the weeks you don’t have guests!
3. Having Bad Tenants
Obviously, getting tenants is a prerequisite for making money from your rental property. However, getting just any tenant does not guarantee you profitability.
The risk of having a bad tenant and getting stuck with him/her could be even worse than the risk of not having a tenant at all. True, not having tenants means no rental income; however, if you get bad tenants, you run the risk of your rent not being paid on time while utility costs being accumulated.
Additionally, depending on how bad your tenants are, your rental property might get more damaged that normal use supposes. If your tenant is a really bad one, refuses to pay the rent for several months in a row, and destroys the property too much, you might even risk dealing with an eviction. You will have to go to the local court, file a notice, schedule a court date, show up on that date, empty the property, and repair it. Evictions are very costly (could reach a few thousand dollars) and time-consuming (up to a few months) procedures.
It is crucial that you do everything possible to choose good tenants.
From Rented.com: While accepting or denying guests will be different than choosing tenants, the message remains the same: It’s crucial to property screen your guests. We’ve heard our fair share of Airbnb horror stories, so be sure to avoid any potential horror stories from happening in your home.
To try to avoid the risk of having bad tenants, go through the process of selecting tenants carefully. Put for yourself some unwritten rules about what kind of tenants you would feel most comfortable in dealing with. Meanwhile, make sure you don’t discriminate against potential tenants on the basis of age, gender, religion, social status, etc.
When you choose possible tenants, ask for recommendations from previous landlords and/or employers. Write a very specific lease agreement. If you are unable to find good tenants, it might be a better idea to lower a bit the rent that you are asking for for your rental property than getting just any tenant to start receiving rental income.
Another important thing—make sure you get the landlord insurance. It is higher than the insurance you pay for the property you live in, but the risks associated with a rental property are also higher. You want to make sure you have this insurance if you will have to deal with any serious damage caused by bad tenants.
Another option is to hire a professional property manager—either an individual or a company which will deal with your tenants directly. You may have to pay the property manager a fee, but this will save you a lot of troubles in communicating and following up with the tenants.
From Rented.com: Vetting guests for short-term rentals may be different than vetting tenants for traditional rentals. Because you often have a lot less time to accept or deny a booking, many property managers will use technology to scrape the internet for mentions of the property and vet guests against a database. If working with a property manager isn’t for you, make sure you’re screening guests with tools like Safely.
4. Higher Than Expected Expenses
Let’s face it. The cost related to being a landlord does not end with the purchase of the actual rental property. Just like any other property, rental properties require constant expenses.
You have the mortgage payment, taxes (higher than for your primary home), insurance (higher than for your home), and maintenance (potentially higher than in your home because of the risks associated with tenants). Ideally, the rental income should cover all these costs with plenty left to guarantee you a positive cash flow.
To avoid the risk of having to pay money for your rental property instead of making money from it, do your homework carefully before becoming a landlord. Do the math.
Make the proper calculations before buying a rental property to know how much it will cost you and how much it will bring to you. Make sure you will get positive cash flow.
From Rented.com: Calculate your rental income potential and expenses with this Airbnb rental income calculator. Want to see how much a property management company would offer you in fixed income? Find out here.
While you should be careful when making the decision to enter real estate investing, these risks shouldn't prevent you from working with rental homes. With an arsenal of tools and a strategy on how to best mitigate rental risks, you'll be on the fast path to building wealth and a passive income.