7 Ways to Lower Your Risk When Investing in Real Estate
One of the great advantages of real estate over stocks is the predictability of income, when you buy a rental property, you can accurately predict the average annual return and cash flow. However, the risks of investing in real estate are real in themselves, from bad tenants to poor cash flow and bad contractors, anyone looking to investing in real estate must plan for and mitigate the overall risks of real estate investing.
1. Cash Flow vs Appreciation
Too many investors are blindly counting on future rental returns on their properties. The cost of real estate in some districts and cities may decrease and even at the national level prices can fall. Even when real estate prices experience a free fall, rents do not fall at all. Cash flow is always more predictable, you know the market rents, you know the purchase prices and the estimated mortgage payments and you need to know your long-term average costs.
2. Don't Underestimate Expenses.
Here's the most common beginner investor mistake, underestimating expenses. New investors get excited when first evaluating rental properties, and they fail to adequately forecast costs like maintenance, repairs, vacancies, taxes, management fees, accounting, insurance, and more. A property’s cash flow is not rent minus the mortgage payment, it is rent minus all of the above expenses and then minus the mortgage payment. Remember, just because vacancies and renovations don't happen every month, doesn't mean they can be ignored. Some of those events are irregular but extremely expensive, so you should factor in average long-term costs in your monthly cash flow.
3. Over Leveraging.
Leverage is one of the main benefits of real estate investing, where you can buy hundreds of thousands or millions of dollars worth of assets, funded primarily by other people's/banks money. And at the same time, it is also one of the biggest risks when investing in real estate. Leverage can increase your return on real estate investments, but it can also increase your losses.
4. To Big Renovation Projects.
Renovation project management is a skill in itself and when it comes to hiring and managing contractors is sometimes one of the toughest challenges real estate investors face, and that's not talking about permits, inspections, contingencies, and the other higher real estate investment risks that come with large renovation projects. One of the options is to completely abandon repairs by buying turnkey real estate or at least start with a property that requires only minor refurbishment and gradually tackle larger and larger renovation projects as you build trust and comfort with contractors.
5. Protection From Damage.
Part of your job as a landlord/company is to protect your property from damage. This can be done by protecting your apartments with these rental property improvements. However, not all measures to protect tenants include physical repairs and some of these take the form of protective legal clauses in your lease that help you place more legal liability on your tenants and make it easier to take out bond deductions. The risks associated with investing in real estate are inherent to tenants, but that doesn't mean you can't mitigate those risks with proactive planning.
6. Screen Your Potential Tenants.
If there is one investment risk that real estate investors always underestimate, it is the risk of having bad tenants. Always start your process by carefully submitting your rental application to gather basic information about your candidates, you should ask for these things your every candidate; credit reports, criminal records, eviction reports, income statements, rent history, and more.
7. Rent Collection.
The is a big problem when your tenants stop paying rent and you will be left to pay the mortgage yourself until you complete the eviction process. In some cases, this process can take months. So once the lease is signed make sure to set up online rent collection, where your tenant will have recurring payments that come out the first time per month.
It's all about having control over your real estate investment returns as you can lower your risks. Remember, if you cannot accurately predict rental income, then you are doing it wrong. So make sure to follow these strategies and tips described above to reduce your real estate investment risks and generate consistent, high-yielding rental income for years to come.