In investing, there is a saying that the higher risks you take, the higher your chances for a big payoff. Consequently, risky investments also come with a higher chance of failure. So how risky is investing in single-family rental homes? While all investments carry some risk, many investors are drawn to real estate because it appears to be a safer route to growing wealth. And, in the right circumstances, it can be. We will now be looking at some of the inherent risks of real estate investing- and how rental property owners manage those risks.
The Bad Deal
One of the biggest reasons a rental property investor will lose money on an investment is if the property just has way more problems than anticipated. It is, in short, just a bad deal. Some reasons a Fort Worth investment property can be “bad” include discovering hidden structural problems that will be too expensive to fix or choosing a poor location.
You could avoid getting yourself into a bad deal by doing thorough research on the property, the neighborhood, and the local market before you go ahead and buy a property. You should have a detailed inspection done, preferably by an independent inspector. You should also talk to neighbors and city officials, check plans for possible zoning changes or new construction, and conduct a thorough market analysis.
Negative Cash Flow
Another risk that rental property investors run into is paying more expenses every month than what they get in rental income. This is known as negative cash flow. Overspending on repairs, not setting an accurate rental rate, or having a high vacancy rate are some things that can lead to long-term issues with negative cash flow. Another contributing factor is the high financing costs.
Learning about estimated costs and calculating your expected return on investment (ROI) will help keep your cash flows on the positive side. You should also know the other key numbers all rental property investors need in order to evaluate a rental property properly. If you don’t think you are doing it correctly, consider asking Real Property Management Trailhead experts for assistance.
Probably one of the scariest reasons that make investors hesitate before investing in a single-family rental property is the risk of ending up with a problem tenant. Especially if you are new to tenant relations, problem tenants can be extremely frustrating –and costly– to deal with. 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. You could run a complete background check and get as much information as you can about their personal and financial situation. You could also contact former landlords for feedback. Be on the lookout for red flags and instances when the tenant can’t seem to provide the information you ask for. If you notice anything, it’s best to move on.
Still, one of the best ways to manage risks involved in rental real estate investing is to have the right experts on your side. This is why hiring a quality Fort Worth 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.
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.