The Real estate is one of the investment options can bring medium as well as long-run returns. The major reason could be that real estate is perceived to be less risk compared to investing in stocks since in real estate investments it is highly unlikely that an investor can lose all. People usually think that they can get the extra cash or go to the bank and get a loan to purchase a property with the perception they will get quick returns without encountering any risk. Don’t get confused when purchasing a rental property as real estate investment is not risk-free. In that understanding, below are some of the main risks that rental property investor might encounter.
- Purchasing the wrong type of property
The profitability of your real estate investment will depend on whether you are purchasing the right kind of property and in the right place. When making a choice on the rental property, remember that you are in business to make money. It is not like you are purchasing a home that you will live together with your beloved ones. Before the first tenant comes in, it is wise not to overspend on the property so as to increase the chances of making a good profit. Don’t head for unnecessary extras at the expense of dealing with major defects. Let not even an amazing fireplace or a beautiful fireplace blind you so that you end up purchasing a much more damaged rental property.
To avoid the risk of buying a wrong rental property, bring along a building inspector. An inspector will carry out a professional inspection of your property and uncover any problems or hidden damages that require attention before letting out the building
- Inability to get tenants
Just because you bought a new rental property does not imply that you'll get full occupancy and reap quick profits. After purchasing a nice property and preparing it for renting out you might remain stagnant searching for tenants to occupy. These can Risky especially when you expect monthly rent that would cover for the mortgage loan you recently acquired from the bank to purchase that property.
If you fail to get a tenant you will have to find other income sources like investment savings salary to cover for the insurance property taxes mortgage and other expenses property. Desperation for positive cash flow should not allow you to just get any tenant to move into the rental property.
Do enough research before buying an actual rental property to minimize the risk of being unable to find a good tenant. In the bottom line, just find a property that has a high demand and is located in a place where the occupancy rates are high.o effectively manage the rental properties that you possess.
- Getting bad tenants
To be able to make money on a rental property investment the first thing you require tenants. Getting tenants will not guarantee that your investment will be profitable, as you might land on bad tenants. Even worse, is that the risk of being stuck with bad tenants is huge than the risk of lack of tenants. With bad tenants around, you run the risk of not being paid at the proper time utility costs as accumulates. The tenant might also damage your property well using it badly.
The risk of eviction might follow after the property is destroyed or even when tenants fail to pay for the rent for several months. This might lead to time being consumed on court cases solving tenant eviction issues.
Peruse through the tenant selection process so that you don’t discriminate potential tenants based on the social status, age, gender, or religion. To be on the safe side when dealing with bad tenants’ risk, secure a landlord insurance to cover for any serious damages that bad tenants might cause.
- High expenses
Purchasing a rental property and becoming the landlord does not mean your costs are over. Rental properties incur maintenance costs just like any other property in the market. A landlord will essentially have to pay for the maintenance, taxes mortgage payment and insurance. But as a property owner, you ought not to worry as the rental income should be enough to cater for this expenses and even give you additional cash flow.
Therefore, before embarking on any rental property investment you should do a careful backward background research, so as to avoid the risk of spending more on expenses. Ensure you have positive cash flows and know what costs you'll encounter and what you stand to gain from before buying any rental property.
- The risk of market failure in the real estate
While it is true that the real estate market has been exhibiting a good growth over the past years, it is not guaranteed that such a positive trend will continue. When purchasing rental properties, most people usually face the risk of concentration of the property as a large portion of their net-worth is utilized to acquire these properties. If the economic environment of the place where the property is located changes, you may lose a lot of revenue due to depreciation.
You can avoid the risk of asset concentration by diversifying your assets with other investors. Such a move will do a lot in minimizing the risks linked to real estate market and local economic conditions.
To wrap it up
To become a successful landlord in the real estate environment, you ought to take care of any real investment decision you make. After you are aware of the prevalent risks, you will have to come up with a strategy to avoid those risks. First, ensure that whatever property you are purchasing is the right and be located in the area where there are tenants. Secondly, overcome the risks of being unable to get tenants or getting bad tenants. Lastly, manage the risks of incurring higher than expected expenses and market failure. Once you know how to deal with some of these risks, you will be able to effectively manage the rental properties that you possess.