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 can investing in single-family rental homes get? While all investments have a certain level of risk, most investors are drawn to real estate’s seemingly safer route to wealth. And, in the right circumstances, it can 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 reasons a rental property investor loses money on their investment is if a property has a lot more problems than anticipated. It is, in short, just a bad deal. Expensive hidden structural problems or a poor location can be reasons why a Star investment property can be “bad”.
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. At the very least, you should conduct a detailed inspection (preferably with an independent inspector), talk to neighbors and city officials, check zoning plans for any changes or new construction, and do 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. 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.
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. Take note also of the other key numbers that all rental property investors use to evaluate a rental property properly. If you are unsure about how you are doing things, consider asking Real Property Management Boise experts for assistance.
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 be extremely costly and frustrating to deal with, especially if you are not yet that good with 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. For one, you can carefully evaluate every prospective tenant before leasing your property to them. In addition to a complete background check and getting as much information about their financial and personal situation as you can, also ask for feedback from their former landlords and references. 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 Star 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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