When it comes to investing, there is a saying that the more risk you take, the better your chances for a big payoff. Without a doubt, risky investments also bear a higher chance of failure. As for investing in single-family rental homes, how risky is it? Though all investments have some risk, most investors are drawn to real estate because it seems like a safer route to growing wealth. And it absolutely can be, in proper conditions. In what follows, we will examine some of the inherent risks of real estate investing – and how rental property owners can manage those risks.
The Bad Deal
One of the major reasons a rental property investor will lose money on their investment is that the property has far more problems than predicted. It is, in short, just a bad deal. A Newburgh investment property can be “bad” for many reasons, plus discovering hidden structural problems that will be costly to resolve or choosing a poor location.
While not all of these things can be anticipated before you buy a property, you may be able to evade 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 that is 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
One more risk that rental property investors every so often run into is paying more expenses each month than you get in rental income. This is known as negative cash flow. Overspending on repairs, not knowing how to set an accurate rental rate, or experiencing a high vacancy rate are all things that can lead to recurring 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 numerous 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 Results experts for assistance.
Problem Tenants
Probably one of the major reasons 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 frustrating to deal with, especially if you are new to tenant relations. While there are no guarantees that you can totally steer clear of a problematic tenant, there are ways to reduce your chances of ending up with one. For example, make sure to evaluate every potential 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 observe any red flags or the tenant can’t seem to provide the information you ask for, it’s best to move on.
One of the best ways 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 Newburgh 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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