If you’re thinking of buying rental properties, they can often be a great source of revenue. But be careful, they can also be dangerous investments.
One of the dangers of renting a property is that, obviously, you need to find a tenant who can pay the rent. But even if they can pay the rent maybe they lose their job and they can’t pay it anymore. Or maybe they’re still able to pay it, but they just don’t feel like doing it. And they develop the attitude of, “You know what. Go ahead and evict me.”
My company owns thousands of multifamily units, and we deal with that all the time. We’ve had plenty of situations where five, six, eight months later people can still be sitting in the property, without paying rent. During COVID, for example, the eviction process slowed down tremendously. People were in the units, without paying rent, and we had to cover that cost for almost a year.
But taxes are still due, and the insurance is still due and you just have to pay it. And you need to have a buffer, and you need to have reserves. So, it isn’t for the faint of heart.
Here are a few other factors to consider when considering purchasing rental properties.
Market Volatility: Real estate markets can be unpredictable. A downturn in the economy or a local market can lead to property values and rental demand decreasing. You may then find yourself scrambling to cover mortgage payments and other expenses.
Maintenance Costs: Don’t forget, properties require ongoing maintenance and unexpected repairs, and those can quickly eat into your profit. As a landlord, you are responsible for ensuring the properties meet certain standards. If you don’t take care of the maintenance issues promptly, you might even face legal consequences. Setting aside funds for maintenance and repairs is essential.
Regulatory Changes: Real estate is subject to numerous regulations that can change over time. You’ll need to stay informed about local and national laws concerning rental properties. Those include rent control measures and tenant rights. Again, failure to comply can lead to legal issues and financial penalties.
Financing Challenges: It’s not always easy to obtain financing for rental properties. In fact, it’s often harder than for primary residences. Interest rates, eligibility criteria, and loan terms can vary, and you may face obstacles securing favorable financing. High-interest rates or unfavorable loan terms can eat into your potential profits.
Market Saturation: In some areas, the market may already have a bunch of rental properties, leading to increased competition among landlords. This can cause a decrease in rental prices and make it more difficult to secure tenants. It is essential to do thorough market research in order to identify areas with high demand and growth potential.
Natural Disasters: Properties located in areas that are prone to natural disasters, such as hurricanes, earthquakes, or floods, face additional risks. Insurance costs may be higher, and the potential for property damage can impact the investment’s overall viability. Proceed with caution when purchasing in those areas.