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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- Member since 2016 · 13k+ posts · 12k+ votes10y
There is plenty of risk associated with income property investing. Many go bankrupt investing in real estate. The reason they went bankrupt was not because of the investment vehicle it was because of lack of education and understanding of how to operate a business. Unlike investing in stocks the investment in real estate is actually the setting up of a business. It is not as most see it a passive nvestment. What its boils down to is not the fluctuations of the real estate market that causes investors the biggest trouble it is the abysmal understanding of how to operate a business.
The majority of new businesses go bankrupt in their first 5 years. Real estate investing maybe has a better record because the vehicle is inherently less risky but ultimately it comes back to the individuals understanding and correct operation of the business that determines success or failure.
If new investors do not enter into this prepared to lose everything they have they should keep their money in a mattress.
Risk is part of the fun, the adrenalin rush, in living life. It's only money, paper, and has no real value if not sent out to earning it's keep.
- Jerusalem, IL · Member since 2016 · 12 posts · 7 votes10y
Thanks a lot @Thomas S.! Any advice you can give to a new RE investor to avoid those kinds of failure situations?
- Investor · Charlestown, NH · Member since 2016 · 48 posts · 15 votes10y
the best way to avoid risk is to pay cash for your properties. Sure the market might go up and down
but the rent will still come in. If you have a vacancy that will cost you on your return. I have never seen a foreclosure on a property that was paid for. You only have to look back 8 years to see what happened to investors that used debt to finance there properties. This is just my opinion I own 2 rental properties both paid for. You need to do your home work.
- Investor · Chicago, IL · Member since 2015 · 29 posts · 9 votes10y
Originally posted by @Yoni Weisbrod:
Thanks a lot @Thomas S.! Any advice you can give to a new RE investor to avoid those kinds of failure situations?
My suggestion is start small and local. My wife and I have only just started REI when last summer we bought a 2-flat with plans to rent out one unit and live in the other (commonly called house-hacking). The mortgage on the 2-flat we could easily pay with our 9-5 jobs so vacancy wasn't really an issue - we could absorb it if we had to and did for about 6-months while we had some major updates performed on the house (new HVAC, 2 bathrooms gutted, new plumbing in one unit, etc.). So now we have renters in the one unit of the 2-flat and they cover 95% of the mortgage so that frees up our work income to invest in other things and to pay down debt. In a few years we will buy another 2/3/4-flat in the area to add to your portfolio and once we move out of the 2-flat we bought last year that property will have very nice cash flow in an appreciating area. I think we will max out at 5-7 local units we will self manage.
Clearly we are buy + hold investors and living / owning in a large city we don't worry about property values crashing due a single industry closing which could be an issue in a more rural setting. And don't over-extent yourself - I think having a years worth of bills saved up is a little crazy and I am no where near that conservative, but that said I can't see taking all the equity we have in our properties (we also have a condo the wife lived in for several years before we got to together we now rent and I own a house downstate which I rent out using a property management company) and buying up another property just yet either.
As other have stated in the thread, I don't see REI, at least how we are doing it, any more risky than investing in stocks. We pick the neighborhood to buy in, we vet the tenants we rent to, we decide how much we want to invest to updating the property, we have the control and have a tangible asset. If the housing market crashes the equity we have in the property will down of course, but our mortgage is locked in and rental prices will not be affect in any great degree. At this point we don't plan to sell the house anytime in the next 20+ years
So buy an affordable SFH or smaller multi-unit in your area and get your feet wet. If you love it, buy some more properties a year or 2 later. If not, try to reclaim whatever money you put to into buying the property and move on to a different invest strategy.
- Property Manager · Cumming, GA · Member since 2015 · 261 posts · 199 votes10y
People will always need food and shelter. The buy and hold business model is a pretty safe place to invest in if done right.
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes10y
Originally posted by @Yoni Weisbrod:
Thanks a lot @Thomas S.! Any advice you can give to a new RE investor to avoid those kinds of failure situations?
Learn the risk and hidden costs. All areas of real estate investing have both. Here on the site the 50% rule is often talked about. It says; over time over a portfolio of properties your expenses (not including financing costs) will be about 50% of your gross income.
Yes this is a crude rule of thumb nut most new investors would never guess the expenses are that high. Repairs or reserves for future repairs, management cost, vacancy, tenant placement costs, tenant turnover costs, legal and accounting costs, are all hidden costs that beginners are often unaware of.
- Investor · Scottsdale, AZ · Member since 2015 · 130 posts · 102 votes10y
@Yoni Weisbrod - The risk involved in having a mortgage (good or bad debt) is still debt and still risk. If you want to play it safe, then pay cash for a property. You can usually get a better deal and have more built in equity, plus you don't have to rush to rent it out in a vacancy and wait for the right tenant at the right amount. Much less of a headache. Those are the intangible when you don't haave a mortgage on the line.
If you're saving up cash for a property, then put your money in a low-turnover mutual fund to keep taxes low, then when you have enough, pull it and buy a property.
You could also buy a property, and just throw all extra money at the house to pay it off, then borrow and do it again on your next one. No matter what anybody tells you, it is risky having millions of dollars of mortgage debt. I happen to have 7 figure mortgage debt that I am currently working to pay off. But I know my risk tolerance and have lots of diversification. That isn't for everybody though.
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