In the risk-filled world of real estate investing, having a smart strategy can help you reap the rewards.
Investing in real estate is risky business. But the rewards—an extra stream of income, the chance to build wealth and that gold ring called financial independence—can be well worth the reach.
Risk arises from uncertainty. And, in the world of real estate investing, there is no “set it and forget it.” Risk management for real estate investments requires ongoing diligence and a strategy that needs to be constantly monitored and adjusted accordingly.
As Drew Reynolds of Realized reflects, “Real estate investment is risky. The dollars at stake are often significant. The losses can really hurt. However, through proper risk management, a diligent investor can “stack the deck” in their favor.”
Therefore, risk management can be defined as the process of reducing the probability and limiting the severity of potential negative outcomes involved with real estate investments. In other words, having a solid real estate strategy in place.
The first step in mitigating risks is being able to identify what they are. Here are three of the most common risks that threaten to derail every real estate investor—along with straightforward tips for overcoming them:
Three of the Most Common Risks that Threaten Real Estate Investors
#1: The risk of not getting what you think you paid for.
Buying the right property in the right location is perhaps the most important part of being a successful real estate investor. And, it’s important to not overspend on a property. For example, make sure you don’t buy a rental property that is more damaged than it looks, or you risk dealing with costly repairs and maintenance.
TIP: Bring along an inspector to any property you are considering—a professional that can discover any hidden damage.
#2: The risk of bad tenants—as well as no tenants.
The risk of getting stuck with a bad tenant can actually be worse than not having any tenants at all. With the former, you run the risk of rent not being paid on time while utility and/or mortgage costs accumulate. If an eviction is necessary, it can be a very costly and time-consuming process.
Choose a location with high occupancy rates and a property that is in high demand. Once you’ve purchased a good property and prepared it for renting, the next step is finding responsible tenants. To keep up with your payments, you’ll need the rent amount to at least cover the home’s mortgage, taxes and any repairs or maintenance before you can turn a profit. And, to stay competitive, you’ll need to stay within the average rent rate for your area.
TIP: Do your homework and carefully screen tenants. Do everything possible to choose good tenants. It is also important to obtain insurance and legal protection in case a tenant attempts to sue you.
#3: The risk of the housing market.
Even though the market currently looks rosy, there’s no crystal ball that ensures this trend will continue. If the economy of the neighborhood or city goes downhill, you may lose money in the depreciation of the rental.
TIP: One way to avoid this risk is to diversify your portfolio into multiple locations. Stay on top of trends and keep an eye on comparable properties in areas around the US.
As Rebecca Lake of SmartAsset puts it, “Owning a rental property is a bit like walking a tightrope and there’s no way to predict how things will pan out.” She continues, “If you misjudge the market or choose the wrong tenants, that can have serious implications for your bottom line. Knowing what the risks are can make it easier to anticipate problems.”
To Mitigate Risk with Real Estate Investments
The bottom line when it comes to real estate risk is to do your homework. And work with the experts, such as HomeUnion®.
From start-to-finish, we’re there to help you every step of the way, from finding the best property to overseeing the day-to-day property management tasks. We’ll ensure your lease is detailed and covers all the important bases—so that your real estate investments are not only hands-free but worry-free as well.
To learn more, schedule a consultation with HomeUnion®.