When talking about investing, there is a saying that taking more risks gives you better chances for a big payoff. Realistically, risky investments also carry a higher chance of failure. So how risky is investing in single-family rental homes? While all investments come with their own sets of risks, most investors are drawn to real estate’s seemingly safer route to growing one’s wealth. And the right circumstances can certainly let it be. Here are some of the inherent risks of real estate investing, and how rental property owners mitigate those risks.
The Bad Deal
Probably the biggest reason a rental property investor loses money on their investment is when the property has far more problems than anticipated. It is, in short, just a bad deal. Some reasons a Burbank investment property can be “bad” include discovering hidden structural problems that will be too expensive to fix or choosing a poor location.
While you can’t anticipate all of this before you buy a property, you can avoid getting into a bad deal if you do adequate research on the property, the neighborhood, and the local market before proceeding. You should also get a detailed inspection done (if possible, hire an independent inspector), talk to neighbors and city officials, check for plans for zoning changes or new construction, and do a 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. Some of the reasons for negative cash flow are overspending on repairs, inaccurate rental rates, or a high vacancy rate. High financing costs contribute to this too.
If you want to keep your cash flows positive, you need to learn about estimated costs and calculate your expected return on investment (ROI) before buying. There are also other key numbers that all rental property investors need to know to be able to evaluate a rental property properly. If you are not sure if you are doing it the right way, consider asking Real Property Management Tri-Cities experts for assistance.
One of the biggest hesitations investors have before buying single-family rental properties is the risk of encountering 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 you cannot get a guarantee against problematic tenants, you can lower 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. This could include a complete background check, gleaning as much information about their financial and personal situation as you can, as well as contacting former landlords and references. If the tenant seems to have difficulty providing the information you ask for, or if you notice any red flags, it is best 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 Burbank 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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