Let’s face it. Real estate investing is not all roses, especially for beginners. Although it offers great potential for return on investment and for making money, real estate investing for beginners is a risky business. The good news is that real estate investing is very much learning by doing, so after a few years of experience you are guaranteed to start making better, smarter, more profitable, and less risky real estate investments. However, the question of how to go through these few years without crashing into any major problems remains. To help you out in your endeavor as an aspiring real estate investor, here are the most common risks of real estate investing for beginners and how to avoid them:
1. Not being able to make the mortgage payments, i.e., foreclosure
Maybe the scariest of all risks associated with real estate investing for beginners is the risk of foreclosure. New real estate investors are less likely to be wealthy and thus more likely to depend heavily on their rental income for making the monthly mortgage payments for their investment property. If you as a real estate investor become unable to cover your mortgage for a few consecutive months, you run the risk of foreclosure on your rental property, i.e., you risk losing your property to the bank.
Remedy: Don’t let the fear of foreclosure discourage you from investing in real estate. After all, foreclosures are not so frequent. To avoid this risk, make sure you conduct careful and diligent real estate market analysis and investment property analysis to get all necessary real estate comps to know how much exactly you expect to receive from your investment property and how much to spend on it. This way you will know whether you will be capable of paying your mortgage payments each month. For best results, use an investment property calculator like Mashvisor’s.
2. Expenses exceeding the rental income
This risk related to real estate investing for beginners is very similar to risk #1 discussed above. Even though you are a new real estate investor, you should not allow yourself to run more expenses on your rental property than what you make from this property. Otherwise, you will end up having negative cash flow, i.e., you will be losing money from your investment property rather than making money from it. That’s a big NO-NO in real estate investing for beginners, and not only for beginners.
Remedy: Once again, your solution is to start out with investment property analysis using Mashvisor’s rental property calculator as soon as you have selected a potential investment property. Compute how much your rental income will be and how much you will need to spend on your property to keep it running, and make sure that the difference is positive cash flow for you.
3. Not being able to find tenants
Another important and major risk in real estate investing for beginners is the tenant risk. Regardless of how hot your real estate market is and how amazing your investment property is, you might be unable to find tenants. This means that you will have a high vacancy rate, i.e., there will be plenty of periods when you make zero money from your rental property, so you actually end up losing money from it rather than making money. And that’s what no real estate investor wants – new or experienced.
Remedy: This potential problem in real estate investing for beginners also has a possible solution. First of all, make sure you study and analyze carefully the available housing markets and rental markets so that you choose a real estate market with a high demand for rentals and relatively low supply. Focus on college towns, places with a dynamic job market, locations with millennials and baby boomers populations – really anything that is likely to have lots of potential tenants. Second, make sure you choose the property type that is sought out in your location. For example, an apartment in a college town is likely to be much more successful as a rental property than a luxury single family home. A single family property, on the other hand, will be demanded in a location popular with young families. Studio apartments are badly needed in major cities like New York, San Francisco, Boston, and Seattle. Third, try out different rental strategies. If you are unable to rent out your investment property in the traditional way, try it as an Airbnb rental. It might be that you are able to attract more short-term rental guests than long-term tenants. Or vice versa.
4. Finding tenants who are too destructive
Or you might end up finding tenants and then regretting it for the months to come. When engaging in real estate investing for beginners, you should be very careful not to get tenants who just cause too much damage. If the damage they cost is worth more than the rent, then it is simply better not to have them in your investment property at all, even if that means temporary vacancy.
Related: How to Pick the Perfect Tenant from Multiple Applications
Remedy: To lower the occurrence of this real estate investing for beginners risk, first of all, develop and use a diligent screening process. Conduct screening checks to make sure you get the right tenants. The time and effort will be worth it. Second, draft your tenancy agreement carefully. Make sure to include clauses which clearly describe the obligations and the rights of the tenants and the landlord, how much damage is admissible, and how to proceed in case of too much destruction by the tenant. Moreover, get the proper property insurance. Property insurance for rental properties is more expensive than for homes, but it is absolutely worth it in case of major damages. Finally, become an expert on evictions. While this should be your last resort, you need to be aware of how to go about evictions in case you ever need to engage in one.
5. Not being able to cater to tenants and maintain the property
When practicing real estate investing for beginners, you are very likely to be unaware of the level of work and devotion that is required from a real estate investor in order to be successful. You will need to perform urgent fixes (a water pipe leaking, the heating system breaking, etc.) as well as conduct regular maintenance works in order to keep your rental property running and your tenants happy. This is a lot of hard work!
Remedy: The best solution to the risk of not having enough time to take proper care of your investment property and your tenants is to employ professional property management services. Of course, though, these come at a price, so make sure to include this price in your calculations of expenses and cash flow.
Related: The Property Management Services Which Every Real Estate Investor Needs
6. Hidden structural problems
In real estate investing for beginners, you might end up buying an investment property with serious hidden structural problems. In other words, your rental property might start falling apart in a few years. Then you might end up losing everything as a real estate investor.
Remedy: To get a good evaluation of the state of your investment property, make sure you get a home appraisal before you buy the rental property. Property appraisers are professionals who will be able to tell you exactly how much your potential investment property is worth and in what state it is. So, their fees are worth it, especially for new real estate investors.
Related: Why You Need a Home Appraisal Even If Paying Fully in Cash
7. Real estate depreciation
In this case, by real estate depreciation we mean the opposite of real estate appreciation. Generally speaking, real estate properties are expected to increase in value over the years, mostly because of being built on land which is a very limited resource and because of growing populations. However, this doesn’t mean that all properties are guaranteed to grow in value. Thus, a major risk of real estate investing for beginners is investing in a rental property the value of which drops in a few decades, so that you end up losing money from your real estate investment.
Remedy: Once again, there are things you can do to limit the risk of negative appreciation for your investment property. Just be very careful in your research and real estate market analysis. When choosing a market for your first real estate investment property, study the development plans and the economic growth prospects to go for a location with strong positive real estate appreciation.
8. Getting in trouble with the local authorities over Airbnb rentals
Short-term rental properties such as Airbnb rentals can be a very profitable strategy in real estate investing for beginners and experienced investors alike. However, because of the recent growth of the Airbnb industry, many local authorities have been issuing legislation to limit this business, under pressure from the local hotel lobbies. As a new investor, you might end up in lots of trouble if you rent out your investment property as Airbnb in a place where this is illegal or if you fail to pay all fees and dues.
Remedy: Actually this risk is maybe the easiest to avoid. Just read all relevant local – state and city – laws that govern short-term rentals to make sure that they are legal and to know how they are managed in your housing market if you plan to go for this rental strategy now or at any point in the future. Also you need to remain updated on any new developments in the legislation in this regard as the processes are quite dynamic at the moment.
While real estate investing for beginners comes with a lot of risks, there are usually – relatively easily – available ways to avoid these risks. Don’t let the risks associated with real estate investments prevent you from entering this exciting world; after all, all investments come at a risk. Along the road to becoming a successful real estate investor, remember to learn from your mistakes as well as successes.
