Many Americans rent their homes instead of buying them — in fact, more are doing so than at any other point in the past half-century. The math is increasingly on their side, as those without the means to acquire big real estate holdings may be better off renting than they would be buying, particularly as young professionals. But, for those who can afford to invest in real estate, the reverse is also true. It’s a great time to buy and rent a property because there are so many renters out there looking for places.
Of course, owning a rental property isn’t just easy money. If that were the case, everyone would be in the market for a new income property. The reality, of course, is far more complex. Rental properties offer their owners the chance to make big profits, but they also come with risks.
The key to successfully investing in a rental property is to manage your risk and make your property as efficient and as profitable as possible. In order to do that, though, you’ll need to familiarize yourself with the risks that face your rental property. Here are a few to focus on along with tips for how to minimize them.
The real estate market could go down
There’s only so much land available, but there are increasing numbers of human beings. And everyone needs space to live, work, and play. So real estate must get more valuable over time, right?
Actually, yes — at least, that’s the theory, and there is plenty of evidence to show that it is a sound one. But don’t mistake the macro trend for a short-term guarantee. It is always possible for a real estate property’s value to decline, or for a property to be overvalued in a “bubble.”
That’s a risk every real estate property owner has to live with, but there’s a lot that you can do to avoid having to sell low on a pricey property. For one, you need to carefully research your decision to buy an income property. That means researching your location and the property itself, but also considering whether or not you should be investing in one at all. For those with the means, real estate is a great opportunity, but you have to have enough in the way of assets to be able to hold onto an unprofitable property in the short-term without being forced to liquidate.
With the right research into your potential property purchase, you can be more sure that you won’t end up with a lemon. And with enough introspection and honesty about your own goals, available time, and means, you can be more sure that you’re buying a property you can afford to hold under the right circumstances — even if those circumstances are tough.
Your property could decline in value
Sometimes, the whole real estate market goes down. Other times, it’s your property that struggles. Maybe newer, fancier buildings go up nearby, or maybe something goes wrong that damages your property. That could cut into the profits you’d otherwise make by holding a wise real estate investment over time.
Mitigating this risk starts with research, of course. You should know if competitor buildings are planned for the area. Those could dilute the rental stock (and lower rents) and make your building look older and more run-down by comparison. The other way to mitigate this risk is to invest in your property with regular preventative maintenance and repairs. You should be sure to stay one step ahead of any maintenance needs your property may have. Neglecting this sort of thing will lead to bigger problems that cost you more money in the long run.
You could end up with a bad tenant
Few risks to a rental property are as serious as that of a bad tenant. A bad tenant can damage your space and disrupt neighbors, exacerbating the two other risks that we already discussed. And a bad tenant may be unable or unwilling to pay their rent — which will keep you from earning income on your income property.
Evicting bad tenants can be tough. Though it’s not always fair, the law sometimes favors renters over tenants. Your best bet for mitigating this risk is to be careful about who you let sign a lease. Use reliable landlord software to set up a rental application and get a tenant credit check and background check on your would-be renter. Make sure that your tenant can afford the rent and has a history of paying his or her bills.
Making money with a rental property can be great, but it’s not always easy. Take care and manage the risks to ensure that you get the wealth-building tool you deserve.