When you invest in a rental property, you always hope that it’ll be profitable. Not only should property values increase over time, but you should be able to earn a nice monthly return on your investment.
Unfortunately, this isn’t always the case.
Recognize rental property risks
As is the case with any form of investing, there are potential risks involved when it comes to rental properties. In order to be an educated investor, it’s important that you identify and address these risks before making any financial decisions.
1. Buying at the wrong time
As you’re well aware, the real estate market can experience harsh swings. Right now, most markets are valued at the highest point in nearly a decade.
If you purchase when the market is up, there’s always the risk that you’ll pay too much and actually take a loss when you decide to sell down the road.
This loss could eat up all of the profits you made along the way, essentially rendering your investment worthless in the long run.
2. High vacancy rates
Owning a rental property doesn’t mean you’re going to find tenants.
There’s always the risk of being unable to fill a property and suffering from the ill effects of high vacancy rates.
While there are a lot of different levers you can pull to fill a property, it may not be possible to consistently keep tenants without lowering your rate.
A word of advice: It’s a good idea to study occupancy rates in the neighborhood you’re hoping to invest in.
3. Vandalism and burglary
Many investors choose to purchase rental properties in lower income neighborhoods. This is because property values are lower, the majority of people rent and it’s relatively easy to find good deals.
When investing in less than ideal neighborhoods, you need to remember that crime rates are generally higher.
Owning a piece of property in a high crime area means vandalism and burglary are real threats. Not only could this leave you with costly repairs, but complicated legal procedures may follow.
4. Negative cash flow
Before purchasing a rental property, it’s incredibly important that you run the numbers and figure out exactly how much you’ll need to bring in per month in order to experience positive cash flow.
In order to do this accurately, you’ll have to take every possible factor into account. This includes mortgage, property taxes, utilities, vacancy, ongoing maintenance and any other regular or anticipated expenses.
No matter how well you run the numbers, there’s always the risk that you could experience negative cash flow. In other words, you could do everything right and still lose money on the property.
If you can’t afford to lose money, you probably shouldn’t invest.
5. Foreclosure
Ultimately, all of these risk factors can build on one another and leave you behind on your monthly payments. If that happens, foreclosure is always a threat.
Not only could you lose the rental property, but a foreclosure would put a black mark on your financial history and hurt your chances of obtaining favorable financing (professionally or personally) in the future.
Weigh the pros and cons
The lucrative benefits that rental property investing often promises are tempting, but don’t be foolish enough to assume that it’s easy and risk-free to invest in these properties.
For every possible benefit, there’s a potential risk involved.
It’s important that you come to terms with both the pros and cons before making a decision about whether to buy an investment property.
Don’t talk yourself out of an investment because there’s risk involved, but do acknowledge its presence and proceed with caution.
Anna Johansson is a freelance writer, researcher and business consultant specializing in entrepreneurship, technology and social media trends. Follow her on Twitter and LinkedIn.