How do you mitigate rent related risks

Question

Let’s say I find a property that’s just barely cash flow positive (I am in the SF Bay Area so its hard to find great +ve CF deals.. not impossible but difficult for new investor). One of my concerns is how to mitigate rent related risks such as:

#1 One of the renters stops paying rent but promises they will pay next month , and then next month..

#2 If the rents in the area go down 3-5 years down the line due to macro factors, suddenly making the investment cash flow negative

#3 If the area downgrades 3-5 yrs down the line, and it becomes harder to find renters at all

How do you mitigate these risks or how have you handled them if you experienced these situations (or others that hit your top line)?

Matthew McNeil · Answer

Mitigate?  Firstly; I avoid investing in areas or assets where scenarios might happen that you've presented.  Secondly; I invest in Class A neighborhoods and buy median priced properties that families with good credit and stable jobs want to rent.  I also have a PM that doesn't put up with any delays or excuses from a tenant such as promising to pay rent...followed by another promise.

In 10+ years of owning rental properties I've never experienced the scenarios you've highlighted.  Granted, I'm not saying I'm immune to those problems, but I can offer this; if I faced these problems or recognized the potential for an area to "downgrade" as you wrote then I'd 1031 Exchange myself out that door and pivot into a better neighborhood or market or asset class.

Sandeep Pai · Answer

@Bill Plymouth Makes sense.. the best mitigation is to have lot of wiggle room by buying at as much discount as possible and using conservative estimates in the calculations.. along with tenant screening which I would look to the PM to cover.

I am still torn between local vs OOS but one thing I am clear on is on not buying cash flow negative hoping for price/rent appreciation in today’s markets. I see some multiplexes in Richmond area that are cash flow positive (unless I am missing something in my calculations). But it seems to me the decision is between adding value to the REs and reaping the full benefit (which I can only comfortably do locally) vs going for wholesalers/turnkey providers OOS and getting only a share of the upside.

Bill Plymouth · Answer

Buying a property correctly is where you make all your money.  Have a criteria and DO NOT overpay.  The next best thing you can do is properly screen your tenants.  Have a criteria and stick to it.

Your area is extremely expensive.  Have you considered looking in a different market?  Maybe a different town or city?

Trenton Miller · Answer

First off.  San Fransisco is one of the most expensive cities in the NATION!  If you want to argue that look at the Governments BAH Allowance...

To answer your questions.

1.  Background checks, credit checks, and income verification.  A property manager should do this for you.

2.  Calculate these "projected" macro factors into your analysis.  If you find yourself in the negative sooner than you'd like, there's your answer.  IE Risk Analysis.  Only you can answer if it is worth it or not.

3.  If you have a CA property, reasonably priced, that isn't a dump, you will find renters.

Bottom line is the numbers don't lie.

How do you mitigate rent related risks

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