When you think of real estate investing, the first thing that may come to mind is a landlord struggling to manage a rental property, having trouble filling vacancies, and dealing with broken toilets. While it’s true that property investment can sometimes involve these issues, rental real estate continues to be one of the greatest wealth building tools available when properly managed. The potential for appreciation on top of the regular income that rental properties provide can make them a very profitable venture. The key to making a good return then, lies in managing your investment properly. In this piece, we want to cover some methods for reducing risk with rental properties so that you can maximize your return on this lucrative investment.
Understanding the Risk Involved in Rental Property Investment
First, you need to be aware of some of the common risks associated with long-term rental properties so you can better understand how to avoid them. Tenant-related risks are the most widespread ones you will hear about, since dealing with a bad or non-paying tenant can lead to a drawn-out court case that leaves a bad taste in your mouth. Another risk to be aware of is market fluctuations, as choosing a bad market can lead to you losing money on your investment. There is also the day-to-day operation of the property to take care of, and some financial risks that can be handled by being careful and proactive.
#1: Conduct Thorough Market Research
One of the most common pieces of advice you hear in real estate is to do your due diligence. As with any other investment, the more time you can dedicate to researching and understanding it, the more likely you are to succeed. If you want to know whether a market is risky or not, you should take a look at the data on it. Make note of things like job growth over time, population trends, and changes in property values. It can give you a good idea of where things are going in a particular market, and you can make a better-informed decision from there.
#2: Choose the Right Property
After you know that you have a solid market to invest in, you need to make sure the property you choose is sound as well. You don’t want to end up with a home in a bad area nobody wants to live in, and you also want to avoid properties that need major repairs which can kill your returns. For this reason, you should strongly consider hiring a property inspector to take a look at a home before you make a purchase decision. You can also take a look at the market rate for similar properties in the same area to get an idea of demand and what you should charge for rent.
#3: Take Care When Selecting Tenants
Careful tenant selection is important for ensuring a smooth management experience over the life of your rental investment. It starts with a comprehensive screening process, where you will want to look into the background and credit history of each applicant. If possible, you should also reach out to any of their previous landlords to get a firsthand account of how they are as a tenant. Your ideal tenant is someone who reliably pays rent and also plans to stay at your property for a long period of time.
A well-structured lease agreement will be the next step in reducing risk with a rental property. This is where you will outline policies on pets, subletting, and upkeep of the property. Besides this, you should aim to check in with your tenants regularly so you can address any of their issues. This builds trust with your tenants over time, but it also helps you identify and make repairs before they blow up into bigger issues.
#4: Insurance and Legal Protections
There are a number of ways to reduce the amount of legal risk you take on by operating rental properties. One of the strategies we’ve already mentioned is developing a comprehensive lease agreement to cover all your bases. You can also consider purchasing landlord insurance with liability coverage for helping with missed rental payments and property repairs. The one thing you will absolutely need to do is make sure you are adhering to landlord-tenant laws, both federally and in your local jurisdiction.
#5: Financial Risk Mitigation
You can reduce the level of financial risk investing in rental properties by using a few strategies. The first of which is maintaining contingency funds for each of property. This can be key in covering maintenance and repairs, but may also be used for things like property improvements over time. Diversification is the other strategy that will help reduce financial risk. By investing in multiple properties spread out in different areas, or different types of rentals, you reduce your level of exposure in any specific market or property type.
#6: Monitoring and Adapting Your Strategy
Finally, you will need to monitor your strategy over time in order to ensure success. By being quick to adapt to changes in the market, and working to fill vacancies with quality tenants, you’re able to maximize the return of your rental property. For example, when one of your rentals becomes vacant, it can be a perfect time to renovate the unit and boost its monthly rate. Another example is staying up to date on market rates for properties in your area so you can be sure you’re charging a good rate.
Bonus Tip: Work with RCN Capital
The easiest way to save on rental property financing is to find a trusted lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Are you looking to purchase or refinance a long-term rental property? Connect with us today.