If you are considering investing in real estate because it is a secure investment, you need to consider the risks that come with it. Buying a rental property may be exciting at first, but have you stopped to consider the worst case scenario? While real estate investing can often be a long-term investment and allow you to retire early, it is important to protect yourself. This is part of the reason why I am not yet ready to invest – but I will be soon.
Simply put, real estate investing has major expenses that come with it. If not properly considered, it could cause you to lose the property and thereby nullify all of your hard work and time for no compensation. This is not what anyone plans for, but it happens. Taking time to prevent this from happening is important. Here are some important risks to consider when selecting a rental property.
Real Estate Expenses / Risks
Regular Maintenance: Every house, regardless of its age, has regular maintenance that needs to be done. This not only includes landscaping and maintaining the yard, but also every day items that come with using a house. The normal wear and tear adds up over time. Make sure to include this in your cash flow estimates to ensure that you are going to make money from the start. If you fail to include it, and you are banking on the fact that there will be no major repairs for years, you are grossly mistaken. Don’t be naive – be prepared.
Vacancy: The area that I live in has very low vacancy rates, but this is at the expense of high property tax and home values. Vacancy rates are part of the business. If you talk to a local Realtor, you should be able to find out the average vacancy rate. Having a rental property vacant for months will be a huge financial burden if you don’t have an adequate emergency fund saved up.
Tenant Issues: While it is possible to protect yourself from most tenant issues, there is no way to guarantee that you wont have any issues. A general rule of thumb is to estimate conservatively so that you are prepared for the worst case scenario.
While investing in real estate has its risks, it isn’t too much. Many of these you can avoid with careful consideration and preventative action. By screening your tenants, calculating and estimating the expected maintenance costs (as well as vacancy), you can get a pretty clear picture of what it will cost you. It is better to know ahead of time than to have a bad experience and get out of rental properties forever.
What do you do to prevent these risks from actualizing?
Great reminders. I’m focusing on tenant selection to try to minimize these risks!