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How Risky Is Investing in Real Estate Really?

See-Saw With Benefit Blocks Outweighing the Risk BlocksIn the investing world, there is a saying that the higher the risks you take, the higher the chances of a big payoff. It also follows that risky investments also carry a higher chance of failure. So how risky can investing in single-family rental homes get? While all investments involve some measure of risk, most investors think of real estate as a safer route to growing wealth. And if the circumstances are right, it can definitely be. The following are some of the inherent risks of real estate investing, as well as how rental property owners can mitigate those risks.

The Bad Deal

One of the biggest reasons a rental property investor loses money on their investment is if a property has a lot more problems than anticipated. It is, in short, just a bad deal. Some reasons a St. Charles investment property can be “bad” include discovering hidden structural problems that will be too expensive to fix or choosing a poor location.

Even when you can’t anticipate all of these things before buying a property, you could still avoid getting yourself into a bad deal by doing as much research on the property as you can, the neighborhood, and the local market as you can before you decide. You should have a detailed inspection done, preferably by an independent inspector. You should also talk to neighbors and city officials, check plans for possible zoning changes or new construction, and conduct a thorough market analysis.

Negative Cash Flow

Another risk that rental property investors run into is paying more expenses every month than what they get in rental income. This is known as negative cash flow. Overspending on repairs, not setting an accurate rental rate, or having a high vacancy rate are some things that can lead to long-term issues with negative cash flow. Another contributing factor is the high financing costs.

To keep your cash flows positive, it helps to learn as much as you can about estimated costs and calculate your expected return on investment (ROI) before you buy. Take note also of the other key numbers that all rental property investors use to evaluate a rental property properly. If you are unsure about how you are doing things, consider asking Real Property Management Three Bridges experts for assistance.

Problem Tenants

Probably one of the major reasons investors think twice about buying single-family rental properties is that they do not want to risk having a problem tenant. Especially if you are new to tenant relations, problem tenants can be extremely frustrating –and costly– to deal with. While you can never completely avoid a problematic tenant, there are ways you can lower your chances of ending up with one. Before agreeing to lease your property to a prospective tenant, make sure you evaluate each one carefully. You could run a complete background check and get as much information as you can about their personal and financial situation. You could also contact former landlords for feedback. If you notice any red flags or if the tenant has difficulty providing the information you ask for, it might be best to move on.

One of the best ways you can mitigate the risks of investing in rental real estate is by having the right experts on your side. This is why hiring a quality St. Charles property management company like us is a great option for rental property investors. Our local market experts can assist you with market evaluations, neighborhood recommendations, vetting tenants, tenant communication, and much more. Contact us online to learn more.

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