When it comes to investing in sure things, real estate has always been at the top of the list. Real estate can add diversification to your investments and pay off significant dividends over time. What’s more, there are multiple ways to get into real estate investing, including becoming a rental property owner.
Investing in real estate is often considered less risky than investing in stocks because people are less likely to lose everything in the real estate world. However, some people get the wrong idea that buying a rental property will guarantee quick money with no risk. There are plenty of liabilities to be aware of that go with owning a rental property, and it’s essential to understand them to limit the amount of damage to your finances.
Here are some common risk factors to consider.
The most common risk of owning a property is the risk of high vacancy rates. Naturally, since your tenants are essentially the source of your income, your property needs to be occupied by tenants for a good part of the year. Usually, you will want your vacancy rate to be below 10 percent to achieve maximum profits. However, it is still possible to reap a decent profit on your rental property with an occupancy rate of about 75 percent.
Moreover, most banks and lenders consider vacancy/occupancy rates when deciding whether to lend property owners money. According to the FHA, the average accepted occupancy rate by most banks comes in at 70 percent or above. When planning your finances, you should always calculate an estimate of the expected vacancy rate and add it as an expense and assume the worst to avoid any unprecedented financial disruptions.
Location, Location, Location
You should always consider the location of the property. Some areas might seem like a great choice due to lower prices and higher occupancy rates, but, in reality, these numbers might indicate that the area is either high in crime or underdeveloped.
Purchasing a rental property in a neighborhood with a higher crime rate might seem like a good idea if you’re looking at the property’s price. However, the risk lies in the high probability of your rental property getting vandalized, which might lead to more expenses than you initially expected.
Always choose your location carefully when looking to invest in real estate property ownership. While it might sound like a good idea to invest in an up-and-coming part of town, the risks are not worth the actual cost.
Pro Tip: When investing in rental properties, it’s always a good rule of thumb to protect your assets with CT Rental Property Insurance. This unique coverage provides rental property owners peace of mind regarding handling issues like vandalism, crime, natural disasters, and more. CT Rental Property Insurance gives property owners protection over unexpected losses and helps keep investments safe from costly damage.
Negative Cash Flow
The cash flow or a rental property is the profit that owners earn from that property after paying off their expenses, mortgage payments, and taxes. The cash flow is typically much lower than the rental rate of the property.
Having a positive cash flow means that owners are earning more money than their investment. A negative flow means that your expenses, mortgage payments, and taxes are higher than your property income. This results in you losing money over time.
To keep the positive cash flow going, it’s essential to have accurate calculations of your property’s expenses and costs before purchasing it. This includes considerations of estimating all the various expected and unexpected costs, such as repairs, maintenances, vacancy rate, and property management.
In a perfect world, you only rent your property out to quiet, orderly, and respectful people. However, this is never the case as there will always be at least one tenant who plays loud music or holds large parties, or leaves a mess in their unit. A property owner should make sure that the tenants who will occupy their units will not cause additional troubles or bring about financial losses due to repairs.
While not foolproof, screening tenants thoroughly, including background checks and rental history inquiries, can help give you an idea of what to expect from a particular applicant. Some tenants might have a bad credit history of not paying their rent on time, which is not something you’ll want to take on when looking to fill a vacant unit.
Or some tenants might have bad habits or lifestyle choices that manifest in damages to your building, leaving you with additional maintenance costs.
About Byrnes Agency
At Byrnes Agency, we offer insurance solutions that can be tailored to meet your specific needs. Whether you’re looking for personal policies or commercial coverage, we have the right coverage for you. To learn more about our products, contact us today at one of our two locations.
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