Serious risk in owning multiple properties?
Jerusalem, IL · Member since 2016 · 12 posts · 7 votes
Serious risk in owning multiple properties?
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
10yYou are actually looking at it from the wrong angle. It is LESS risky to own multiple properties than it is to own one. Diversification decreases risk, whether in real estate or in stocks. Owning multiple assets in an asset class spreads your risk out over those assets. Take for example if you own one property and it is vacant. You have 100% vacancy. Gee better hope you can float that mortgage. But if you own 10 properties and have one vacancy, you only have 10% vacancy....which is much easier to absorb with the other 9 properties throwing off profit.
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- 10yNathan MillerPro MemberProperty Manager · Grants Pass, OR · Member since 2009 · 429 posts · 201 votes
You are absolutely correct. In the same way that only investing in stocks would put you at risk for a stock market collapse. I never advise anybody to put all their eggs in any market in particular, including real estate. I have really good friends who promise me another collapse is imminent because the market is feeling "bubbly" again already. Whether that be the case, I don't know, but I'll be diverse in my investments anyway.
The good thing about real estate however is that even in a market collapse, people still need to rent. That makes it a bit more secure than other investments.
- Realtor · Keystone Heights, FL · Member since 2015 · 340 posts · 118 votes10y
There's always risk in investing. The goal is to mitigate that risk by properly budgeting and analyzing the deal(s) before hand to ensure they're profitable then setting aside capital reserves (or putting other mechanisms in place) to mitigate any major economic downturn or large expense.
- 10yNicole A.Pro MemberRental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
Well, I have found that just because property values fall, doesn't mean the rental market falls. When people foreclose on their home, they probably become a renter, therefore making the rental market stronger.
What you just need to worry about is that your rental income will *at least* cover the mortgage, taxes, insurance, repairs, vacancy and all other expenses. Ideally it should give you profit after all expenses.
Another way to look at it is if you have mortgages, you have debt, and therefore not much that you actually own in assets for people to try and sue for. People do "equity stripping" for that reason sometimes. But I feel it's a little drastic.
This is all calculated risk. You make sure the numbers work before you buy. :-)
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes10y
You are actually looking at it from the wrong angle. It is LESS risky to own multiple properties than it is to own one. Diversification decreases risk, whether in real estate or in stocks. Owning multiple assets in an asset class spreads your risk out over those assets. Take for example if you own one property and it is vacant. You have 100% vacancy. Gee better hope you can float that mortgage. But if you own 10 properties and have one vacancy, you only have 10% vacancy....which is much easier to absorb with the other 9 properties throwing off profit.
District Invest Group545 Reviews - Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes10y
Sure, having tons of mortgages and relying on tenants to pay them is risky. With adequate reserve accounts, you should be fine though.
I could be trimming limbs, fall off the ladder, break my neck, lose my job and then lose everything too but I still own a home, cars and atv. What if's don't bother me, I'm more focused on how many checks I pick up each month and that I'm actually making $$.
There's a lot of potential risk but protect yourself from it. Have adequate savings, analyze the property and area properly to know your values, screen your tenant(s) very well and have a good lease agreement.
- Jerusalem, IL · Member since 2016 · 12 posts · 7 votes10y
It seems like there's far less diversification in owning several properties than there is in buying index funds that themselves own thousands of stocks across industries, locations, and capital sizes. With so little diversification and the additional leverage risk (especially with multiple properties), it feels like real estate might be far riskier than long-term index investing.
I don't think that that's a bad thing necessarily, and it might be the reason why real estate is a serious potential wealth builder, I just want to be clear on the amount of risk I'm taking on before I invest.
It sounds like the common approach is to reduce risk as much as possible by using conservatively calculated financials and keeping significant reserves on hand in case of extreme disaster. But if you buy multiple properties, I would think that it would be very difficult to maintain sufficient reserves to handle disaster scenarios. Maybe I'm wrong :)
- Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes10y
Each individual SFH or MF would fund/support its own reserve. I try to include a fully funded 6 month vacancy reserve into my purchases. If not, you can partially fund it initially with the 1st month's rent and then do a monthly contribution until you meet the reserve you're comfortable with.
- Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes10y
You definitely can be exposing yourself to a great deal of risk. It depends on what sort of assets you buy when you buy multiple properties. If you buy a large number of properties of the same type, in the same neighborhood, around the same rent range, you are not really diversifying away your risk and a single large layoff at a nearby company could ripple through your entire portfolio.
However, if you are buying some multifamilies here, some singles there, some notes, then the increase in number of assets works with you. Even better if you already have a portfolio of non-real estate assets and you use real estate to further mitigate risk.
Also, it's been stated that rental prices don't necessarily decrease with a market crash (which is why rental homes is a great diversification addition to a holistic portfolio including stocks/bonds/misc). Last crash, this was because a large number of homeowners were foreclosed on and had to become renters.
- Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes10y
Originally posted by @Yoni Weisbrod:
It sounds like the common approach is to reduce risk as much as possible by using conservatively calculated financials and keeping significant reserves on hand in case of extreme disaster. But if you buy multiple properties, I would think that it would be very difficult to maintain sufficient reserves to handle disaster scenarios. Maybe I'm wrong :)
I have been considering this recently as well. The thing you have to do is to include cash reserves as Working Capital while calculating IRR. The cash reserves needed to be secure can reduce your true IRR by as much as 1 percent.
- Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes10y
The multiple vs single property is perfectly parallel to the SFR vs MFU decision and exposures as @Russell Brazil pointed out.
RISK:
- Some cry 'the sky is falling' when the market declines -- a falling market only hurts one scenario -- that of an owner FORCED to sell at the wrong time, like having a w2 job relocation. SFRs and MFUs bought 'right' (aka with built-in equity and cash flow), do not suffer any losses in a declining market at all, if they can just ride it out and await the cyclic recovery. Even if you go 'up-side-down' you have zero loss until you make a bad decision to sell prematurely.
- The other issue of asset protection from law suite is IMO and 20 year experience fallacious and over hyped. If you have no people skills, can't avoid confrontations, don't manage maintenance (aka attempt deferred maint.), then you better get all the protection you can afford. Walk in the tenants shoes, be fair and you will reduce this kind of risk to nil.
- Jerusalem, IL · Member since 2016 · 12 posts · 7 votes10y
Thanks @Jeff B., excellent point about riding out the cyclic market prices.
The argument against riding it out is that a real estate crash could likely be a part of a wider market crisis, potentially involving loss of business income or even loss of a job. In order for you to be able to continue paying multiple mortgages, cash flow from all/most of the units would need to remain constant. I.e., the numbers would need to be very accurate and rental prices couldn't drop much (which seems rare even in crisis). Guess you better be good at estimating expenses.
- Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes10y
@Yoni Weisbrod 2008 was a hit in the market due to the Bank Bailouts. It was hard to get new tenants and it became obvious that keeping one was easier that getting another. I sent letters, "during these hard times, we all struggle to make ends meet. Consequently, I am promising to freeze your rents for this year to assure you we value your tenancy" - - did not suffer one move out that year. I bought right back in '97 and calculated the break-even point to be 70% occupancy, so while profits were lower than expected, I still filed a schedule-E with a positive income for the year.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes10y
@Yoni Weisbrod driving on the road is risky. On some roads you can reach speeds of 65 miles per hour and you pass by cars going the other way that are 3 feet away from you. Hundreds of cars pass closely to you and there is nothing between you and them besides a line on the road. Any one of them could could cross the line and hit you.
The point? Risk is everywhere. I think it is more risky to NOT own multiple rental properties. Putting your money in the stock market or expecting social security to take care of you seems more risky to me.
Investors reduce risk through many strategies. Personally I think it is important to buy at the right price. I also have more than one exit strategy and only buy desirable properties.
- Investor · Fort Collins, CO · Member since 2016 · 10 posts · 2 votes10y
To me, it is called Real Estate, because it is REAL. You can drive by it. You can look at it. You can touch it. You can go inside. Barring catastrophe, it will always be there.
I also have stocks, 401Ks, and IRAs, which I call Funny Money. It is just a number in a computer somewhere, and there is not really anything real behind it at all. Someone can say the wrong thing in China, and I can wake up the next day to 25% less than what I had the day before. Or worse.
Even more commonly, I have been hit numerous times with stocks by fraud. Everything is painted rosy, until one day someone finds out that it isn't. Just ask the folks who invested in VW. 40% drop in just a few days. I'll take the REAL asset every time.
- Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes10y
Hello! You just have to go with today's knowledge. You cannot see what is going to happen tomorrow. Real Estate typically move slowly from an experience point of view. If a deal looks good on paper you just have to go with it. Your level of risk can effect your decisions. A growing local economy and a growing population will help you make up your mind. Good luck!
- Rental Property Investor · Charlotte, NC · Member since 2015 · 128 posts · 29 votes10y
Hello,
I concur with the other comments on diversification to limit one's risk. The ultimate goal is to have enough properties to off set any vacancy and reserves in place to insure continuous cash flow.
Good question...
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes10y
All of those things mentioned are risks that can be analyzed, mitigated, hedged, insured against, or otherwise avoided entirely IF you know what you are doing as a RE investor. Which brings us to your real biggest risk as a new investor, YOU. Yes, YOU. YOU are your own biggest risk as a new investor until you know what you are doing. Realizing this fact is half the battle. The only cures for that risk are education and experience. For education, you are in the right place with BP and local REI meetups where you can find local mentors would help too ... for experience, you'll need to get in there and invest, but do so intelligently and deliberately. For me, this means starting out small, locally, and hands on with your own personal residence, financed conservatively so that you have equity and can afford to carry on your own if all else fails, but with the idea to fix to add value and eventually turn into a rental. By going through the process end-to-end this way, you will learn how to find/finance/buy investment RE, how to repair/remodel, how to manage, etc. with those lessons in hand you can assess and mitigate the other risks mentioned. I would wish you good luck, but instead will say to educate yourself so you don't need it.
- Macomb, MI · Member since 2015 · 141 posts · 45 votes10ySmart investors have multiple exit strategies. It is also critical not to over leverage yourself. Scared money, don't make no money
- Investor · NW Indiana · Member since 2015 · 98 posts · 99 votes10y
@Yoni Weisbrod "With so little diversification and the additional leverage risk (especially with multiple properties), it feels like real estate might be far riskier than long-term index investing."
You are absolutely right. But, as any investment, as the level of risk rises the potential benefit/return rises as well. That's why we are in real estate, for above average returns. The level of risk is something that you have to live with but at the same time try to control it by making prudent decisions. Also, calculate in and Opportunity risk, the time you will be spending in Real Estate instead of doing something else (education, work,..)
@Todd Richmond "I also have stocks, 401Ks, and IRAs, which I call Funny Money. It is just a number in a computer somewhere, and there is not really anything real behind it at all."
I guess, this is supposed to be a joke.
- Jerusalem, IL · Member since 2016 · 12 posts · 7 votes10y
People have mentioned diversification as a means of reducing risk. As I understand it, diversification works when assets behave differently from one another, reducing the odds that any one type of catastrophe causes a severe loss.
What are some ways that you can diversify in REI? As someone with zero actual experience, here are some things that I've thought of:
1. Vacancy risk - Buy properties in different locations, reducing the risk that unexpected high vacancy rates in one location will affect another.
2. CapEx risk - Buy properties in different states of distress to diversify away the risk of unexpected capital expenditures.
3. Market price risk - Buy properties in different markets to reduce risk of bubble pops or other price drops in any single market. This would likely be prohibitive for many investors.
4. Credit default risk - You would need multiple income streams that do not highly correlate with the RE market to diversify away this one. Perhaps a full time job + RE investments would count to some extent.
5. Tenant refuses to pay - By avoiding D locations, buying larger properties and screening tenants, you probably avoid much of this risk and having multiple properties in and of itself diversifies risk that remains.
6. Interest rate hike risk - No one knows where rates will go, but they are quite low right now. Having both fixed and variable rate mortgages would diversify, but seems strange to me. Not sure why.
I guess I'm wondering how much diversification is actually used to reduce overall risk in REI in the real world.
- Punxsutawney, PA · Member since 2016 · 45 posts · 16 votes10y
Originally posted by @Russell Brazil:
You are actually looking at it from the wrong angle. It is LESS risky to own multiple properties than it is to own one. Diversification decreases risk, whether in real estate or in stocks. Owning multiple assets in an asset class spreads your risk out over those assets. Take for example if you own one property and it is vacant. You have 100% vacancy. Gee better hope you can float that mortgage. But if you own 10 properties and have one vacancy, you only have 10% vacancy....which is much easier to absorb with the other 9 properties throwing off profit.
Hi Russell, I happen to agree with you that 10 properties helps to mitigate your risk for a vacancy. Its easier to absorb a 10% vacancy than a 100% vacancy, as you described. I'm on board and we agree. However, I believe it may be a disservice to the newby's to deny the big picture, or sugar coat things. There is absolutely no debate that if you have 10 rentals, all belonging to the same asset class, that were the class suddenly to go to hell in a hand basket you aren't going to be in for some pain---major pain. Its risk--no denying it or covering it. A lot of investors merely do what they can do to manage the risk. Buying multiples mitigate the minor to above average problems. But if the Big Daddy problem ever comes, you now have it times 10. Just want to make sure that newby's, like myself, see the big picture.
- Jerusalem, IL · Member since 2016 · 12 posts · 7 votes10y
Awesome post @Charles Lemelle, appreciate your perspective. I suspected that there is a large element of risk at play here by virtue of being so highly leveraged.
- 10yIan WalshBusiness MemberLender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
I have actually found that people with normal incomes seem to be at the most risk when they have between 3-6 properties. People that own 15+ tend to have less risk if they purchased correctly. This isn't risk relative to the market, because I am assuming that the person purchasing buys low enough where cash flow would be safe even in a market dip. This is for people that have normal income rates and run into 2-3 evictions at one time when only owning 4-6 properties. The turn overs and evictions seem to be too much for these people and there aren't enough properties cash flowing to offset the financial burden. This is just my observation.
- Jerusalem, IL · Member since 2016 · 12 posts · 7 votes10y
Originally posted by @Ian Walsh:
I have actually found that people with normal incomes seem to be at the most risk when they have between 3-6 properties. People that own 15+ tend to have less risk if they purchased correctly. This isn't risk relative to the market, because I am assuming that the person purchasing buys low enough where cash flow would be safe even in a market dip. This is for people that have normal income rates and run into 2-3 evictions at one time when only owning 4-6 properties. The turn overs and evictions seem to be too much for these people and there aren't enough properties cash flowing to offset the financial burden. This is just my observation.
Wouldn't owning 15+ homes just increase the risk of evictions proportionally?
- Punxsutawney, PA · Member since 2016 · 45 posts · 16 votes10y
Originally posted by @Yoni Weisbrod:
Awesome post @Charles Lemelle, appreciate your perspective. I suspected that there is a large element of risk at play here by virtue of being so highly leveraged.
Thanks YoniI do not want to take a from Russell's post. It is great advice for a great strategy. But I is what it is, the game is the game. Any game has risk, that's what makes it gamey !!!! You can even manage the highly leveraged that you described above-----pay cash for the property--buy it outright. It still won't stop the Big Daddy problems. Buy it outright at 100k, Big Daddy comes, now its worth 40k. You're gonna be crying in some beer at that point. LOL
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