There is no arguing that owning rental property can be a very lucrative investment strategy. However, it’s definitely not a walk in the park. There are many challenges that beginner property investors face – becoming a real estate investor itself is actually a challenge for some.
If your goal is to become a successful real estate investor, then you have to identify these challenges in advance and understand what you can do to overcome them if they ever occur – or better yet, completely avoid them!
Below we summarized 4 of the most common challenges of owning rental property and possible solutions to overcome them for a successful real estate investing career. So, without any further introductions, let’s jump right it.
Challenge #1: Choosing a Good Location
“Location, location, location.” As a beginner real estate investor, you should get used to hearing this every once in a while in the real estate market. The first tip that real estate experts and successful property investors always give out to beginners is to be mindful of the location of the investment property before making a purchase. Why? Simply because based of the location, owning rental property could yield a great return on investment or be a financial disaster.
In real estate investing, different locations have different purchase prices, rental incomes, occupancy rates, property taxes, and other factors that determine how profitable an investment property is. Moreover, location is constant – property investors can change anything about their investment properties, but they can’t move them!
Therefore, a major challenge for beginner property investors is owning rental property in a bad location. To overcome this challenge, property investors have to perform a real estate market analysis to evaluate and compare different housing markets or areas to find which one will yield the best return on investment. In addition, keep in mind that your local real estate market might not be the best place for owning rental property. A beginner real estate investor might prefer his/her local housing market in order to be closer to the investment property, but this might not always be a smart investment decision.
Click here to determine whether you should be owning rental property in your local housing market or out-of-state.
Challenge #2: Determining the Optimal Rental Strategy
In real estate investing, property investors can either rent out their investment properties as traditional (long-term) rentals or Airbnb (short-term) rentals. Which rental strategy is optimal? This is one of those real estate questions that don’t have an ultimate answer. The right answer really depends on each real estate investor, his/her investment property, and personal investment goals. However, there are some factors for property investors to keep in mind when determining the optimal rental strategy.
As always, the first factor is the location in which you’re owning rental property – some locations yield higher rental income and return on investment for traditional rentals, and the opposite holds true. The second factor is the investment property itself. The real estate market offers different types of investment properties – some are suitable for traditional rentals while others for Airbnb rentals. In addition, your target tenants affect the optimal rental strategy – are you targeting families or tourists, for example?
To overcome this challenge, a beginner real estate investor must remember the above factors in order to decide which rental strategy yields higher profits for owning rental property.
Challenge #3: Setting the Right Rent
The next challenge of owning rental property is setting the appropriate price to charge tenants renting the investment property. This is a major challenge in real estate investing because how much you charge for rent will determine your rental income and cash flow. In addition, rent can be something that either attracts tenants to your investment property or pushes them away. Therefore, when owning rental property, you don’t want to charge too little and end up with low rental income and negative cash flow, but you don’t want to change too much and not get any renters either. Quite a dilemma, isn’t it?
The best way to overcome this challenge is with the help of a comparative market analysis. When performing this analysis, property investors basically find and analyze investment properties in their locations that are similar to theirs in order to estimate the rental income of owning rental property and, thus, decide on an appropriate rent to charge. A comparative market analysis can easily be performed with the help of an investment property calculator!
Challenge #4: Avoiding High Vacancy Rate
An investment property without a tenant loses money every day it remains unoccupied. This will ultimately affect the real estate investor’s rental income and positive cash flow. This is why vacancy is one of the biggest challenges property investors must know how to avoid and overcome when owning rental property.
To overcome this challenge, a real estate investor must first ensure that he/she is investing in a real estate market with demand for investment properties, a growing population, a healthy local economy, and a strong job market. Such locations generally attract tenants and have high occupancy rate – meaning low vacancy rates – which is what makes them great for owning rental property.
Which are the best real estate markets for owning rental property in 2018? Click here for details.
In addition, if you have good tenants renting out your investment property, you need to ensure that they stay. Be responsive to their needs and don’t give them a reason to consider moving into another rental property. Moreover, if you’re evicting a tenant and, thus, know that a vacancy is coming up, don’t postpone marketing the investment property through multiple channels so it reaches the most people and prepare it for a new tenant.
The Bottom Line
Owning rental property does come with challenges, but it also offers great benefits! Thus, don’t let these challenges stop you from becoming a real estate investor. You don’t need to be a real estate expert to succeed in real estate investing. All you need is to identify these challenges as well as the appropriate ways to overcome them if they arise, and you’re all set!