Just as single-family rental investments are a good source of income, these properties can bring forth problems. Below, Forbes explains the six most common pitfalls and how to avoid them. Continue reading below to learn more.
Single-family rental properties can deliver a positive cash flow, build wealth and generate an excellent return on your investment. However, as with any type of investment that offers the possibility of significant rewards, there are risks to be considered as well. As an investor, you have the choice of forging ahead and hoping for the best or taking the time to learn about the potential pitfalls and how to avoid them.
The Key To Success In Single-Family Rentals: Risk Mitigation
While there is no way to guarantee that you won’t ever suffer financial setbacks with your single family rentals, there are many steps you can take to minimize the risk of those negative events occurring. Ultimately, the most successful investors are those who do the best job of risk mitigation. By keeping their losses to a minimum, they accumulate the capital needed to continue expanding their portfolio.
Below are six common potential pitfalls in single-family rental real estate and strategies for avoiding them.
1. Thinking you’re buying an investment, rather than investing in a business:
Most investments are truly passive — you decide when to buy and sell, but outside factors, such as the overall economy and global events, determine the return on your investment. But buying a single family rental property is starting a small business. While local market conditions affect your returns, your actions and decisions have the greatest impact.
Do your homework. Line up your experts. Be prepared to spend the time necessary to learn the business and manage your properties.
2. Not letting the numbers drive your purchase decision:
Investing in single-family rental properties is a numbers game. Buying a property because it is aesthetically pleasing to you, reminds you of the house you grew up in or is a home you could see yourself living in, is a mistake that seasoned investors don’t make.
Buy by the numbers. Rather than evaluating a property from a “Why shouldn’t I buy it?” perspective, use a “Why should I buy it?” approach. Make the economics of the property sell itself to you.
3. Making too many improvements:
With single-family rental investments, the key is keeping the property safe, up to code, clean and in line with comps of other rental properties in the area. Allowing “project creep” to upgrade to a personal level of visual appeal can result in unnecessary expenditures.
Remember that you are not going to live in the house or resell the property at this moment, so upgrades you might make to entice buyers are not necessary. Perform the repairs and enhancements needed to keep a property competitive and attract and keep good renters.
4. Failing to have sufficient income to cover unforeseen challenges:
Unfortunately, as a property owner, you will likely encounter scenarios like vacancies that go on longer than expected or an economic downturn that forces you to lower rents. If you don’t have the reserves to weather these storms, you can find yourself in financial trouble.
You can protect yourself in a number of ways, starting with purchasing the right property at the right price so you are not overextended. Then, it is critical to factor in issues that could temporarily stop or reduce your cash flow when doing your pro forma projections for each of your properties.
They’re your customers. They’re paying down your mortgage. You’re entrusting them with your investment. Yet, problems can arise. Not only is addressing issues with tenants who are behind on rent or violating other terms of their lease costly and time-consuming, but it can also be very stressful.
Engage an experienced property manager. Your property manager can handle all tenant interactions and keep the property running smoothly while you focus on growing your portfolio or simply enjoying time with family and friends without the aggravation of tenant issues.
6. Having properties that are too geographically dispersed:
While diversity in your portfolio is advisable, owning properties in multiple states means learning different laws and markets, working with multiple property managers and vendors, completing multiple state tax returns, doing site visits on properties in multiple states and so forth.
Practice what is referred to in the business as “bundling.” This means having a concentration of properties in just one or two markets. Bundled properties are much easier and more efficient to manage, and the local market knowledge you develop will help you make better decisions.
Protecting Your Portfolio With Expert Advice
These strategies can help protect you from potential pitfalls in single-family rental real estate investing. However, in many cases, you can save time, effort and expense by working with a real estate expert as you start to build your portfolio. Their experience with the challenges of property ownership and the expertise developed in overcoming those challenges can save you from the headaches and losses you might otherwise encounter.
One way to learn from the professionals is to take advantage of turnkey rental services that provide the best of both worlds for new investors. In this type of arrangement, which my clients who are new to investing especially appreciate, investors benefit from the positive return on a rental property while the expert handles all the details, including analyzing markets, acquiring properties, managing renovations, marketing the home and interacting with tenants.
Whatever path you take to property ownership, being proactive in understanding the risks and taking action to minimize them will pay off in the long run.