In the investing world, there is a saying that the higher the risks you take, the higher the chances of a big payoff. It also follows that risky investments also carry a higher chance of failure. So where on the risk scale would investing in a single-family rental home fall? While all investments have a certain level of risk, most investors are drawn to real estate’s seemingly safer route to wealth. And if the circumstances are right, it can definitely be. The following are some of the inherent risks of real estate investing, as well as how rental property owners can mitigate those risks.
The Bad Deal
One of the biggest causes of loss for a rental property investor is an investment property that has far more problems than anticipated. It is, in short, just a bad deal. Some reasons a Lakewood investment property can be “bad” include discovering hidden structural problems that will be too expensive to fix or choosing a poor location.
You could avoid getting yourself into a bad deal by doing thorough research on the property, the neighborhood, and the local market before you go ahead and buy a property. You should have a detailed inspection done, preferably by an independent inspector. You should also talk to neighbors and city officials, check plans for possible zoning changes or new construction, and conduct a thorough market analysis.
Negative Cash Flow
Another risk rental property investors often run into is incurring more monthly expenses than rental income. This is known as negative cash flow. Overspending on repairs, not setting an accurate rental rate, or having a high vacancy rate are some things that can lead to long-term issues with negative cash flow. Another contributing factor is the high financing costs.
To keep your cash flows positive, learn as much as you can about estimated costs and calculate your expected return on investment (ROI) before buying the property. You should also know the other key numbers all rental property investors need in order to evaluate a rental property properly. If you don’t think you are doing it correctly, consider asking Real Property Management Imagine experts for assistance.
Problem Tenants
Probably one of the major reasons investors think twice about buying single-family rental properties is that they do not want to risk having a problem tenant. Problem tenants can really be frustrating to deal with and can cost a lot, too. This can be aggravated if you are new to tenant relations. While there is no guarantee that you can avoid a problematic tenant, there are ways you can slim down your chances of ending up with one. One of these is to really evaluate every prospective tenant completely before agreeing to lease your property to them. You could run a complete background check and get as much information as you can about their personal and financial situation. You could also contact former landlords for feedback. Any red flags that you notice, or if the tenant seems to have a hard time providing information, is a sign for you to move on.
Having the right team of experts on your side is still one of the best ways of managing the risks that come with rental real estate investing. This is why hiring a quality Lakewood property management company like us is a great option for rental property investors. Our local market experts can assist you with market evaluations, neighborhood recommendations, vetting tenants, tenant communication, and much more. Contact us online to learn more.
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