As you may have heard, there’s gold in them hills! In the form of rental property investments, that is –for those who are bold enough to seize the opportunity.
But while rental properties can yield some tremendously enticing rewards –cash flow, appreciation, tax benefits, and equity growth, and there are indeed fortunes to be made –there are also a number of potential dangers to avoid as well. Some that could leave you high and dry if you’re not careful.
From the risks that come from being unprepared, to having unclear or unreasonable expectations, there are plenty of ways to get yourself off on the wrong foot when it comes to rental investing.
In order to create a successful investment strategy, it’s important to have a full picture in mind of what you can expect, as well as a clear plan to reach your investment goals.
Grab your boots and get ready to go west! Here’s a look at the good, the bad, and the ugly –sides of being a landlord. Along with some tips that’ll help you to get off to a good start with your investments.
The Good: Financial Returns
First up, let’s take a look at the good. As you’ve probably heard, real estate investments can offer a number of tremendous financial rewards (after all, it’s consistently ranked as one of the best investments!)
From a chance to diversify your portfolio to cash flow in the form of monthly rental income, there are plenty of reasons that investors across the states are lining up to invest in rental property.
Let’s take a look now:
- Rental Income
It doesn’t get much better than having another source of income. Rental properties provide you with an income right away, just as soon as you get a tenant. There is no waiting to see a return on your investment.
- Long-Term Appreciation
Another benefit of rental properties is long-term appreciation, especially if you invest in an area that’s up-and-coming or an in-demand area that’s seen property levels increase over the years. This long-term appreciation makes buy-and-hold real estate investments tremendously valuable, especially if you’re looking to create long-term financial security.
- Equity Growth
As your property appreciates and as you pay the mortgage down, you’ll be building equity. This will happen even more quickly as you start to add more properties to your portfolio. When done right, real estate investing can be a solid way to grow your wealth for the future.
- Diversification
Real estate also provides diversification, especially if you have a stock and shares-heavy portfolio, which most people do if their primary long-term investment consists of a 401(k) for retirement. Real estate appreciation has been shown to have a relatively low correlation with the stock market, making it a great asset to balance out your portfolio. Plus, there’s a level of diversification within real estate itself, if you invest in different markets across the country, you’ll be insulated against any significant localized housing market downturns.
- A Tangible Investment
One of the great things about investing in real estate is that you’ll have a tangible asset. You have something real that has intrinsic value, that you can see, touch, or live in. It’s also one asset that’s tremendously versatile, giving you options. You can rent it out, live in it if you choose, or even sell it should you choose to down the road. If you’re in it for the long-term, real estate offers excellent long-term value, as property values generally consistently increase over time, even when taking into account any temporary dips in the housing market.
- Tax Benefits
Finally, owning rental property also opens the door to a number of valuable tax benefits. A number of your expenses associated with owning a rental are tax-deductible including mortgage insurance, repairs and maintenance, travel costs to and from the rental, property taxes, and depreciation –which allows you to claim a certain percentage of your property as a loss. With depreciation, you can defer the tax that you would have owed until a later date when the property is sold –at which time it is recaptured. Learn more about how depreciation works. These deductions mean more money in your pocket and less that’s paid out in taxes, helping to make real estate an attractive investment.
The Bad: Unexpected Problems
With real estate investing, bad incidents are generally few and far between. The good news is that many of the negative aspects of real estate investing are things can largely be mitigated by taking precautions ahead of time.
Here’s a look at a few potential issues that can arise when you’re overseeing a rental property –along with some viable solutions.
- Vacancies
One of the risks that come with buying a rental property is vacancies. If you have a mortgage on the property, then the payment –along with the rest of the bills and expenses will be due every month, regardless of if you have a tenant.
Solution: Before you decide to take out a loan and buy a property, make sure you run the numbers taking into account a vacancy period. It’s a good idea to estimate one month per year for this. Make sure you’ll still be able to turn a profit even if the property sits empty for a spell in between tenants.
- Unexpected Expenses and Repairs
Being a landlord also involves paying repairs and upkeep. Leaky faucet? Faulty furnace? While it might be fun to watch the money roll in, it’s less fun to watch it roll like a tumbleweed right back out the door!
Solution: Make sure you sock away enough to cover the costs and expenses should you be left without a tenant for a period of time.
- Being On-Call
On the same note, you as a landlord are the one who will get the calls about leaking roofs or overflowing toilets. Unless you have a property manager to buffer these calls, you can expect to be on call 24/7.
Solution: Get a designated number for emergencies only, and make sure tenants know that they can email you for all non-urgent requests. If you find that you’re spending too much time fielding phone calls, consider outsourcing to a property manager who will be able to take on these tasks for you. If you are going to be self-managing your property, make sure you get a few good contractors lined up. A good plumber, electrician, HV/AC technician, and general contractor are all invaluable.
- Legal Issues
Finally, there’s also the risk of running into potential legal issues; for example, if you end up having to take a tenant to court for eviction or if you need to collect on any damages.
Solution: Make sure you purchase good liability coverage. Additionally, it’s always best to get everything in writing. Always document your screening process, policies, and rental agreements. It’ll make it much easier to prove your case if you end up in court. Finally, make sure you charge a security deposit as that can be applied to damages caused by your tenants.
The Ugly: Problem Tenants
While by and large most tenants are decent lease-abiding folk who work to pay their rent on time and treat your property right, every so often there’s a tenant that doesn’t work out quite so well –as the following tales from The Simple Dollar indicate.
Like the tenant from hell who caught the house on fire. Years ago, Brandon Turner of Bigger Pockets was faced with the predicament of a tenant who wasn’t paying his rent on time, and was left with no choice but to evict him. But the tenant didn’t take the news very well. One night, just before the rental eviction deadline, Brandon received a mysterious text message that read, ‘Your house is on fire. You need to call me.’ It turns out someone had left a box on the stove with the burner on, resulting in $61,000 dollars in damage to the kitchen, as well as smoke damage throughout the house.
Or, take the rodent infestation incident. Chad Carson of coachcarson.com tells of a time he was asked to manage a single-family ranch-style house for a friend. Upon visiting the house, the tenants informed him that they were running a little ‘side project’ with animals. Chad soon discovered that this project involved a basement filled with rats, as well as snakes, turtles, and other critters. When the tenants skipped town without paying the last month’s rent, leaving behind a gang of rats who continued their destructive legacy for months.
Of course, while these –and other stories like them are enough to strike fear into even the most resolute investor, the truth is that these stories are the exception, rather than the norm.
Additionally, many problems with tenants can largely be mitigated by implementing an airtight screening process. With a solid screening plan, you can ensure that you weed out unqualified applicants, drastically increasing your chances of securing an excellent tenant –and making your fortune with rental investments.
See also: Don’t Let These 8 Myths About Investment Properties Scare You Away.
Being a landlord isn’t for everyone, but with a little work and perseverance, you’ll soon be on the road to success. Finding lucrative rental properties is all about securing the right properties, and the right price –and having a solid plan for management. With the right approach, and careful management, you’ll be able to get your real estate investments off to a good start; and will soon be able to start reaping the rewards of your investments.
Are you looking for a solution for your rental properties? Consider reaching out to a professional landlord to take on the day to day work of property management. A good property manager can take the work out of owning a rental, making the prospect of investing absolutely seamless. Start here!
Note: This article is intended to inform and to guide, it’s not meant to be used in place of advice from a financial advisor. The information in this article is subject to change at any time. You should always conduct due diligence before investing in real estate or stock offerings.
Photo by Gustavo Zambelli on Unsplash
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