Risks In Rental Property Investing
Like any other business, rental property investing also entails certain risks which you must be aware of. The major risks in rental property investing are risks of high vacancy rates, bad tenants damaging the property and possibility of a negative cash flow. However, all of these risks can be avoided with proper planning and working with a good turnkey rental property provider. Let us discuss.
Rental Property Investing Definition
A rather unconventional form of real estate investment, rental property investing has continued to grow. The definition of rental property investing is buying refurbished homes and then letting them out to tenants. The increasing popularity of rental property investment can be attributed to various factors. The first and foremost is its promise of immediate returns in the form of rental income.
A rental ready project earns an investor money almost immediately after its purchase. This is a contrast to other forms of real estate investments in which you first have to spend time and resources on construction, development, marketing and selling. The other reason why investors love turnkey rental deals is the responsibility it takes off their shoulders. With rental property investing, you don't have to do all the work yourself. In fact, the rental property provider will source tenants for you and also wholly manage the property for you.
Some Benefits Before We Discuss Risks In Rental Property Investing
In relation to having a turnkey real estate company manage your rental property on your behalf, rental property investing also lets you own property in far off locations. You can for example comfortably own a property in another state or even internationally. This too is a factor that attracts a lot of passive real estate investors to rental properties.
No matter one's reason for investing in rental property, one thing does stand true. This is the fact that rental property investing is a passive route to real estate ownership. Yes, rental property investing lets you own property without being actively involved in the process. The developer does all the renovation and property management company manages the property on your behalf. Your job is just to pay for the rental property and begin reaping profits in the form of rental income. Hence, it is also called as passive real estate investing.
Are There Risks In Rental Property Investing?
Is it risky investing in rental property? This is something many real estate investors stop to ask themselves. In regards to this question, the answer is a simple “yes.” Why so? You may ask. Well, like with any other form investment, something could possibly go wrong with rental property investment as well. You must do your due diligence before stepping in, which includes property inspection, real estate comps, maintenance expenses, property taxes and property protection, etc. The objective of rental property investing is to yield significant return on investment in a relentless way, and also mitigating the risks associated with owning a rental property.
Though it's widely seen as a quick and ideal form of investment, rental property investment isn't totally a smooth sail. There are number of risks involved in this kind of investment. Below listed are the risks or cons of rental property investing that you must know.
1. Unplanned Rental Property Investing
Investing in rental property is almost akin to gambling with one's money. This is because you cannot be entirely sure of the outcome. First and foremost, there could be a possibility that the turnkey real estate company you're investing with isn't genuine. You could end up losing your money if that be the case.
The second reason why it could be a gamble is the issue of location. Many investors buy turnkey rental properties which are far away from them. This leaves them unable to physically verify the condition of the properties. They can then only trust the property management company's descriptions and feedback. This unfortunately may not always be honest.
2. Possible Financial Losses – Negative Cash Flow
When investing in a rental property, there are chances that you could incur huge financial losses. This is especially true if you're dealing with an inept property management company. Some turnkey investment companies are just not right, they lack the capacity and capability to navigate the real estate market. Such companies may end up mismanaging your property leading to you sustaining losses in the form of negative cash flow.
It's advisable to carefully consider the company you choose to transact with. Ensure they're trustworthy and are competent in matters real estate investment.
3. Rental Property Management And Other Expenses
In some instances, rental property investing may end up being costlier than you anticipated. Turnkey companies usually slap their clients with particular charges. Clients for example pay for monthly management fees and other charges including routine refurbishment or repairs.
4. High Vacancy Rates
The fact that you have a rental ready property doesn't guarantee that you'll have tenants to rent it to. It sometimes just happens with rental property investors that they have no tenants to occupy their property, especially if they try to manage everything on their own. Finding and screening tenants, doing paperwork and ensuring low vacancy rates is not an easy job. This leads to losses especially if such a property was their sole investment. The losses add up more if you have bought the rental property through mortgage.
5. Buying Rental Properties at Retail Prices Is Risky
In real estate the price at you which you buy a property determines the profit you will earn from it. In some cases, rental property investors may end up buying properties at retail prices. This is because they may be ill-informed about property prices in a given area or region. This leaves them vulnerable to exploitation by conniving developers and turnkey providers who work in tandem. The is one of the major risks in rental property investing and should be avoided at all costs. As a rental property investor, you should ideally purchase a property at a price beneath the retail price. This will let you make significant profit from it. Click on the link to know How To Buy Rental Properties With No Money Down.
6. Foreclosure by Lenders
A negative cash flow can lead to non-payment of mortgage installments, and you can put your rental property in danger of foreclosure. There are numerous elements which may contribute to a decrease in cash flow from your rental property resulting into non-payment of mortgage on time, which may hurt your odds of getting bank loan approvals later on. To prevent this you must ensure that you break down and run the numbers before purchasing the property. You must do a proper risk analysis for each deal and prepare an exit strategy in case of any eventualities.
7. Rise of Property Taxes
If taxes and insurance components rise faster than your rental income, as they have in the wake of catastrophic events, it means decrease in the net cash flow. Insurance companies will fairly adjust the claims in case of catastrophic events. Therefore, this too can be counted in as one of the cons of rental property investing.
8. Choosing the Wrong Tenants
Choosing great quality tenants is a main consideration to reduce the annual vacancy rate in rental property investing. There will be some vacancy period but it should not be too long to affect to put you in the lurch. Be extremely particular and conduct appropriate due diligence to find and screen good tenants for your rental property. If your tenant pays late, won’t turn off the water, can’t change a light bulb, is a graffiti artist, and is causing havoc on your property, then the depreciation allowance from IRS is probably is not sufficient for you. Therefore, choosing the wrong tenant means risking your rental property investing in a big way, and it can lead into dangers of negative cash flow – a nightmare for all landlords.
How to Avoid Risks In Rental Property Investing
The only way to avoid risks in rental property investing is to carefully consider before settling on one. Ascertain that you are dealing with a trusted turnkey real estate company. Also seek information on matters such as property market prices and investor preferences and so on.
We recommend these 4 markets for a profitable rental property investing:
- Houston Housing Market
- Atlanta Real Estate Market
- Dallas Real Estate Market
- Birmingham Real Estate Market
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