Similar to any other career move, choosing to invest in the real estate market can be a risk. Whether you simply invest the money and delegate the rest of the work to a property management company, or practice the landlord duties firsthand, you’re still the one directly affected by the ROI (Return on Investment). There will always be something to consider, even when you plan every detail. To ensure that you cover all your bases, we’ve made a short list of the potential risks of investing in a rental property.
1. Vacancy Rates
This is one of the first things you should consider when you project your future earnings. A home that rents out at $1,000 a month brings you $12,000 a year in income—if it’s inhabited each month, that is. You need to plan for a home that may sit empty for a few months and decide if you can afford it, should that be the case. You can try to avoid this, of course, by investing in areas that are highly sought after and pricing your homes wisely.
2. Unexpected Expenses
If there’s one thing that we’ve all learned, it’s that you should always overbudget. Anything could happen, from structural damage, to infestations, to damage caused by the weather. Plan for anything, and always have extra funds in your budget for things you wouldn’t expect that may happen.
3. Higher Taxes
The ultimate goal when renting out a home is to make a profit, so you have to carefully calculate all potential expenses and go from there. Repairs and the like are easy to plan for, but what you can’t always predict is the inflation of property taxes. These can, unfortunately, be substantial, so it can potentially affect how much you need your tenant to pay.
4. The Stock Market
The stock market is ever changing, and for a while, it wasn’t reflecting well on the real estate market. Families had to combine households and find roommates to get by. This is why you need to consider the area you want to invest in. If it has seen a change in circumstances, such as unemployment or low wages, you may want to look somewhere else.
5. Bad Tenants
We all hope against it, but it’s a possibility nonetheless. Tenants make or break the owning experience. Even if you work with a property management company, any substantial problems will eventually trickle down to you. Some tenants may be irresponsible with payments, cause damages, or, to an extreme, find a reason to sue a landlord. Make sure your lease ensures your protection.