7 Top Hidden Risks in The Real Estate Property Management Industry
Read Time 10 Minutes
Investing in real estate, particularly residential rental properties is a great way to build multiple streams of passive income. However, owning a rental property is a relatively safe investment, but every property investor cannot achieve guaranteed success in this highly competitive market.
Just like any other real estate investment, there are some risks involved with residential rental real estate investing. Every property investor whether an experienced or a newbie should be aware of the risks and know how to avoid them to find the best rental property and succeed in the business.
So, without further ado, here are 7 top hidden risks of real estate investing that you should be aware of and how to avoid them.
Investing in Undesirable Property
No two rental properties are created the same. If you buy a property not located in a good rental market, you might have trouble attracting good tenants. This means loss of income due to extended periods of vacancy or extra-cost associated with tenants like non-payment of rent or damaging the property. The expenses add up quickly when managing a property and if it exceeds the income on the property, you will end up losing money. The mortgage is your biggest obligation, but there are taxes to pay and other considerations as well to keep in mind.
How to minimize this risk – Location has a big impact on the quality of tenants and your revenue. Due diligence is essential to know the best markets to invest in for rental properties. Take the help of a real estate expert to help you choose the right property.
High Vacancy Rate
The high vacancy rate of a property is a serious risk for any property investor, and it can happen often and quickly if you are not careful. The rental income that comes from tenants is used to cover property expenses and provide a profit. So, without it, your rental property will cost you money instead of earning, if it is vacant for long. This can spell doom for your real estate investment, as you need to pay off the mortgage, property taxes, advertising costs, utilities, HOA fees, insurance, and other expenses. The longer your property is vacant, the more the costs add up. Also, the properties may have a high vacancy rate due to a difficult economic environment, setting the rental price high, located in an undesirable area, and various other reasons.
How to minimize risk – When selecting a property to invest in, keep in mind the market conditions of the area and be wary of the vacancy rates.
The Unpredictability of Real Estate Market
The real estate market is known for its ups and downs due to changing economic conditions. The economy plays a key role in real estate investing and determines the value of the property. For instance, if you buy a property at a time when demand is high for real estate investing, you might be at risk to sell it lower than the initial price because its value has declined as the housing market changes. This might cost you more money than what you have earned while renting out.
How to minimize risk – When entering the real estate investing business, ensure you are up to date with the market economy and how it works.
Unexpected Maintenance
Maintaining a rental property is inevitable. However, major maintenance can be costly running into tens of thousands of dollars. Insurance may cover some unexpected costs, but do not assume everything will be covered. It is essential that you adequately budget for the maintenance from your monthly cash flow. You also must check for any damage caused by the tenant. Normal wear and tear are expected, but there is also a possibility that your tenants cause more damage than security deposit covers.
How to minimize risk – When investing in rental property, it is better to purchase a property that is less than 10 years old.
Hidden Structural Issues
Hidden structural issues is another risk associated with investing in rental properties that you need to be aware of. Many investors end up buying properties with hidden structural problems which they discover later. Hidden structural issues may sometimes be serious and bring unexpected costs for repair and maintenance. Drywall, siding, floors, and ceiling covering the structure make it impossible to gauge the issues.
How to minimize risk – To avoid this kind of risk, work with a property inspector to discover any hidden problems with the investment property before purchasing it.
Negative Cash Flow
Cash flow is the amount of profit that a property investor earns usually after mortgage payments, paying all the expenses, and taxes. Negative cash flow is when your expenses are higher than the payment collected. This is what all property investors would want to avoid. When this happens, you will be dipping into other income to keep afloat with the property, which is never a good thing. Negative cash flow risk occurs when property investors purchase a property without conducting a real estate market analysis.
How to minimize risk – The best way to avoid this risk is by accurately calculating your income and expenses before investing in the property as well as ensure your rental property is located in a prime location as it will yield positive cash flow.
Non-Paying Tenants
Getting tenants is a prerequisite for making money from your rental property. However, just getting any tenant does not guarantee your profitability. The risk of getting a tenant who cannot pay the rent on time can be a constant source of stress and even worse than the risk of not having a tenant at all. Tracking down payments takes effort and may cause your mortgage payment to be late.
How to minimize risk – There are several steps you can take to reduce rental payment problems. Send rent payment reminders, charge late fees, and keep detailed payment records. One of the best ways to avoid this risk is through a thorough tenant screening.
Conclusion
Being a rental property investor is a profitable venture but being aware of the hidden risks involved and how to mitigate them. If you are looking to invest in residential rental real estate, then consult George Boley Jr. now.
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