Any real estate expert can tell you that the way to achieve positive cash flow is to have higher rental income than rental expenses. As well as half your rental income will go towards your rental expenses. But what are the main risks associated with higher rental expenses and thus lower profit? Here you will find five of the major risks to be considered when buying an investment property.
Related: The Guide to Saving Money to Buy an Investment Property
High Vacancy Rates
The main objective when buying an investment property is to make money. What better way to make money than having a happy family occupy your residential real estate property. Tenants pay you money in exchange for a home. But life is hard. Renting out your investment property can be tricky. For one, people need to be willing to rent your rental property. What happens when you can’t find tenants to live in your rental property or even worse find the wrong tenants to rent? You get negative cash flow. All the expenses will come out of pocket. This is why it is always advisable to have surplus money when buying an investment property.
Bad Tenants
As previously mentioned, a destructive tenant can be worse than a vacant investment property. This risk can be limited with a thorough screening process when searching for future tenants. To get a tenant who is going to damage the investment property is costly. The wrong tenant can bring unwarranted extra expenses that will create a hole in your pocket. Constant repairs to the investment property will more likely create a negative cash flow on a monthly basis.
Related: 6 Strategies for Buying an Investment Property Low and Selling It High
Maintenance Costs
Buying an investment property comes with an added risk of repairing damages and maintaining the real estate investment. Real estate experts know that repairs are inevitable. Consistent use and time will ruin appliances like a water heater. Natural forces will ruin the integrity of the investment property like the roof. These repairs are to be expected and hopefully accounted for when deciding on the tenants’ monthly rental payment. Not all repairs will come out of pocket. However, be cautious of the repairs that the insurance covers. This must only mean that the magnitude of the repair is large.
Rental Income Decrease
When buying an investment property, the real estate investor has the power to decide on how much to charge tenants on a monthly basis. Many aspects go into deciding on how much rent can be charged. It is important to consider the location when buying an investment property. Investment properties that have high demand will garner a larger return on investment through a high rental income.
Every real estate investor should be aware of the 1% rule, which states that the monthly rent should be equal or greater than 1% of the total mortgage value. For example, if the investment property costs $250,000 and the investor put a down payment of $50,000, the real estate investor should be making a minimum of $2,000 in rental income . A landlord can get lucky to find a tenant who is willing to pay upwards of 3% of the total value for duration of time. However, when that tenant decides to leave, there is no guarantee that another tenant will be willing to pay the same amount. A landlord cannot wait till he/she finds a tenant willing to pay a high amount for monthly rent. He/she will risk having a vacant property for an extended period leaving the real estate investor with a negative cash flow.
Property Value Decrease
The value of the house is essential when buying an investment property. The real estate housing market is subjected to highs and lows depending on the times. So, when buying an investment property, there is the risk of the home losing a lot of its value during a down period. This is mainly a non issue for most real estate investors. The risk appears when the investor is trying to sell the real estate investment in a down period. There are a lot of factors to consider when selling an income property. If the real estate investment is bringing in negative cash flow, this may tie the investor’s hand into selling. The best advice a real estate investor can receive about a negative income home is to “cut your losses”. Many real estate investors are afraid to lose money on his/her income property, so he/she holds onto the real estate investment longer, losing more money in the process. However, this is only a risk when the investor is looking at selling the investment property.
Related: How to Value an Investment Property
Conclusion
When buying an investment property, it can be daunting to be unaware of the risks that come with the investment. It is important to keep in mind the main pitfalls that come with real estate investments. Here at Mashvisor we bring you the knowledge needed to grow a thriving real estate business. When buying an income property, be cautious of the risk of vacancy, damage repairs and maintenance, bad tenant, the risk of rent, and the value of the property decreasing. Not all these pitfalls are under the real estate investor’s control, but with proper preparation and knowledge they can be accounted for to limit the damage to one’s wallet. Visit Mashvisor for all your real estate investment needs!