Owning a rental property is one of the popular investment strategies available to real estate investors. This strategy has a lot of benefits as well as risks associated with it. Here are some of the risks that comes with this investment strategy and how to avoid them.
Getting a tenant to rent your property is the only way you can make a return on your investment (ROI). Renting your property to a bad tenant is dangerous and can be frustrating. Having no tenant in your property is better than having a bad one. The consequence of having no tenant is zero ROI. But if you rent your property to a bad tenant, rent may be paid late while utility cost is running. Also, your property may be damaged and require you to repair it. If you try to evict them, you would only spend more time and money.
To mitigate the risk of renting your property to a bad tenant, you should thoroughly screen your prospective tenants. Ask questions, run a credit check on their account (if you are allowed to do so), ask their former landlord for recommendation and check other important information.
If you think this would be stressful but still want to own rentals, you can hire a property management firm to do the hard work for you. Just remember that you would need to pay them for the work done—either in percentage or in an agreed amount monthly.
Another risk that comes with a rental property is vacancy. For you to be earning money from your investment, your property needs to be occupied for a significant period of the year. This is why vacancy rates are very important. The lower the location’s vacancy rates the higher chances you have to make money from your property and vice versa.
Avoiding this risk involves planning and knowing the amount of time a property is likely to be occupied. This would help you determine if investing in such locations is the best or not.
Overspending on Property
Another risk that comes with investing in rental property is overspending. What most investors (especially new investors) don’t know is that the cost of being a property owner does not end when you buy a property. There are other essential things and expenses (like renovation, taxes, maintenance, and mortgages) you need to do and pay for before renting out the space.
To avoid this risk, an investor should plan throughout the acquisition phase. Knowing necessary repairs to do on a property will reduce the risk of overspending and thereby increase your ROI.
Rental properties are expensive and risky because it requires you to invest all of your money in a property for a long period. This is different from the ‘fix and flip’ strategy that only requires a few months of funds being tied up. The real estate trends tend to decide investors’ fate because rental properties concentrate assets. For example, if you buy a property when the country’s economy is balanced, and in a few months after buying the property, the economy moved south, you risk losing a lot of money in the depreciation.
The only way to avoid this risk is by spreading out your investment into different economies. This can be done by buying properties in different locations. Another way to do this is by investing in a Real Estate Trust (REITs). This is very similar to stocks, but obviously involves real assets. It involves investing your money into a real estate firm or firms that build property in different locations while you receive dividends at the end of an agreed period.
Location of Property
Location is an important factor when planning to invest in any type of real estate strategy. Some locations might seem to be the best because of the price of the property and the high occupancy rate. However, in other cases, this might not be true. For instance, buying property in places with high crime rates can be very risky. You would risk your property being vandalized and thereby repair will be required more often.
One way to reduce being affected by this is by checking other factors alongside price and occupancy rates. Choose your location carefully when you want to buy a property to prevent running into this problem. However, it might be enticing to invest in these locations because of the low property price. Always check your running cost to your ROI before putting your money into an asset.