how to reduce risk when investing in rental properties

How to Reduce Risk When Investing in Rental Properties

As an investor, you want to make the most out of your rental property and reduce risk by as much as you can.  Especially in today’s market, where inflation is running rampant and housing prices are seeing all-time highs. Investors need to be extra careful when making any moves in these market conditions. Here’s how to reduce risk when investing in rental properties.

Think Cash Flow, Not Cash Appreciation

When investing into rental properties, you want to think cash flow and not cash appreciation. Many investors confuse their rental property investment for an investment like one into the long-term growth stock market. Investment properties are not bought for the intention of cash appreciation. Instead, you should think of your investment like income and see it as cash flow. To stay in stock terms, your investment property is like your quarterly cash dividends you receive, strictly seen as income versus cash that will appreciate. Looking at the Great Recession, rental prices did not take a big hit like the housing market. Rents were pretty steady throughout the market decline, and rose during the recovery.

Choose the Right Location

As you select your rental investment property, think about which geographic market you wish to invest in. Choosing the right location is everything when you are buying your rental property. Look for properties that are in areas where income and population is going up. A typical investor will choose an area closer to their family or an area that they heard about from word of mouth. Do the research and find which locations have a projected increase in income and population over the next ten years. Consider the GDP growth rate to find if the location is overperforming or underperforming based on macro conditions.

Prepare for Your Tenants

Preparing for your tenants includes more than just writing the hyper-protected lease agreement. You should prepare for your tenants in any way you can, like preparing for their children and pets as well. Think about prepping your floors and walls for scuffs. Install door stoppers and make sure all racks, hooks, and shelves are secured into the wall studs. If you wish, prohibit TV mounting to prevent accidents. Replace your glass and screen doors with plexiglass to help protect your property further. Having a hyper-protected lease agreement in place will hold the tenant to expectations that they contractually signed. You can include other levels of protection in the agreement, like requiring all furniture to have felt pads on the bottom to prevent floor scratches.

Understand the Micro and Macro Trends of the Market

On top of choosing the right location, understanding the micro and macro trends of the market you wish to go into is a necessity. The availability of major roads, water, good school systems, shopping centers, and hospitals are all trends of the micro market. The macro trends can have heavy influence and change quickly. For example, during COVID most states had renter’s eviction protection for renters affected by the pandemic and unable to make rental payments. Landlords were unable to evict renters even if they failed to pay rent, leaving landlords with less cash flow. Timing is everything when it comes to investing into a rental property.

Be Careful Using Too Much Leverage

Like in the stock market, leverage can be used in real estate to purchase assets that you do not have the capital for. Using leverage can provide great opportunities for investors, but it comes with a lot of risk. A new investor will find it too risky to use a high leverage. As much as leverage can give you more returns, it can also make you lose more money too. The more leverage you use, the more risk you run. New investors will be at the most risk for taking a lost while using leverage.

Don’t Go All Out on Renovations

If you want to reduce risk when investing in rental properties, avoid properties that need extensive renovations. It can be appealing to find a fixer-upper, with the hopes of generating profits. Extensive repairs are a whole job by itself. You will need various contractors, like plumbers, electricians, or handymen. Try looking at rental properties that do not need extensive repairs. Little fixes here and there are no big deal, in fact, these little repairs will actually bring the value of your property up quickly. The bigger projects can take a lot of time and only cause you a headache in the end. Select a property that is at the right place in its renovation timeline, where you are buying value.

Beware of Bad Tenants

One of the biggest risks you run when maintaining a rental property is the risk of having bad tenants. This problem can be easily prevented with thorough background screenings. When looking for potential tenants, you want to screen for their credit report, criminal reports, eviction reports, income, employment status, and housing history. Having a bad tenant is worse than having no tenant. Bad tenants will only run you dry by not paying rent and breaking the lease agreement. The more work you do beforehand, the less you have to worry about running into a bad tenant.

RCN Capital

RCN Capital offers short-term and long-term financing options for real estate investors. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. Connect with us today to discuss your next real estate investment.

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