When it comes to investing, there is a saying that the more risk you take, the better your chances for a big payoff. Obviously, risky investments also bring a higher chance of failure. So when it comes to investing in single-family rental homes, how risky is it? While all investments have some risk, most investors are drawn to real estate because it looks like a safer route to growing wealth. And it definitely can be, in the right circumstances. In what follows, we will look at some of the inherent risks of real estate investing – and how rental property owners can manage those risks.
The Bad Deal
One of the biggest reasons a rental property investor will lose money on their investment is that the property has far more problems than anticipated. It is, in short, just a bad deal. A Merritt Island investment property can be “bad” for many reasons, among them discovering hidden structural problems that will be expensive to fix or choosing a poor location.
Though not all of these things can be estimated before you buy a property, you may be able to avoid getting yourself into a bad deal by doing as much research on the property, the neighborhood, and the local market as you can before moving forward. At a minimum, you should have a detailed inspection done (hire an independent inspector, if possible), talk to neighbors and city officials, check for plans for zoning changes or new construction, and perform a thorough market analysis.
Negative Cash Flow
Another risk that rental property investors sometimes run into is paying more expenses each month than you get in rental income. This is known as negative cash flow. Spending too much on repairs, not knowing how to set an accurate rental rate, or experiencing a high vacancy rate are all things that can lead to chronic issues with negative cash flow. So can high financing costs.
To keep your cash flows going in a positive direction, you need to learn as much as you can about estimated costs and calculate your expected return on investment (ROI) before you buy. There are several other key numbers that all rental property investors need to know to evaluate a rental property properly. If you aren’t sure whether you’re doing it correctly, consider asking Real Property Management Brevard experts for assistance.
Likely one of the main reasons for some investors hesitate before buying single-family rental properties is the risk of ending up with a problem tenant. Problem tenants can be incredibly expensive and annoying to deal with, especially if you are new to tenant relations. While there are no guarantees that you can completely avoid a problematic tenant, there are ways to limit your chances of ending up with one. For example, be sure to evaluate every prospective tenant carefully and completely before agreeing to lease your property to them. In addition to running a complete background check and getting as much information about their financial and personal situation as you can, you should also contact former landlords and references. If you notice any red flags or the tenant can’t seem to provide the information you ask for, preferably better to just move on.
One of the best methods to mitigate the risks of investing in rental real estate is to have the right team of experts on your side. This is why hiring a quality Merritt Island 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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