Investing in rental property can turn out to be the best financial decision of your life, as it gives you a tried and trusted way to boost your wealth.
However, as with any major decision you make there are some risks that you need to understand and deal with. The following are the main areas for you to look into before making your first property investment.
Not Working Out The Figures Well
Perhaps the biggest risk you’re faced with at the start of this project is not getting the numbers right. It’s easy to just look at the expected monthly rental income, compare it to the mortgage repayments, and decide whether to go ahead on that basis. Yet, while this is a good starting point it’s not all that you need to take into account.
Among the other outgoings that you need to consider are the taxes, maintenance costs, insurance, and bills. It can still be a worthwhile investment even taking all these things into account, but until you’ve worked out the number you can’t be sure whether this is the case or not.
The biggest difficulty here is in working out how to set aside money for emergencies such as repairs when items break down unexpectedly. Some sources suggest that half of the monthly rental income should be set aside for expenses while others mention having three months of rental income in an emergency fund. A third option involves keeping a fund with 1% of the property’s value in it.
With experience, you’ll begin to understand how best to do this. Yet, at the start of your journey as a landlord, you might find that you need to look for advice from those who have already gone through this process and perhaps made some mistakes along the way.
Over-Stretching Your Finances Too Soon
Let’s imagine for a moment that your first rental property is a success and that you’re soon making a healthy profit each year from it. In this case, you’re probably going to be tempted to buy another property or maybe more than one.
Becoming a landlord is a fantastic way of improving your wealth, but you need to be careful to not over-stretch by buying too many properties too soon.
Remember that with each additional property that you own, there is more risk of being affected by unexpected damage or other setbacks. Any interest rate increases or dips in the rental market would also have a bigger effect on you.
There’s no definitive answer to the question of when you should buy more properties and how many to purchase overall. Therefore, this is best viewed as something that you take slowly and use the experience that you gain to work when you feel that the time is right to take the next step and expand your portfolio.
Choosing The Wrong Location
We all know that the location of a property is hugely important when calculating its value and its potential for future growth. Yet, when you’re investing in a rental property this issue becomes even more important because you need to take into account the rental market in the area.
Is it in an area where a lot of people look for rental properties due to the proximity of large workplaces, universities, or some other local facilities? If so, how does it compare to the properties currently on the market in terms of quality and price?
The more you know about the neighborhood, the easier it will be for you to work out whether a specific property is worth investing in. If there are projects planned to improve the area and create new employment opportunities, for example, then this is going to make it a more attractive investment for you to consider.
Getting The Wrong Type Of Insurance
The next point is simpler as the main point you need to understand is that not every type of insurance policy is the same. Rather than getting a standard home insurance policy as you would for a property you live in, a landlord insurance policy is needed for a rental property.
This policy can cover you against similar risks to a standard homeowner’s insurance policy, with the likes of accidental damage, bad weather, and fire being some of the main issues that you may be worried about. However, it’s designed to take into account the different risks involved with rental properties.
One of the main areas to be aware of is that certain kinds of risks can be added on as optional extras. These include clauses that cover you if you lose out on rental income for a period or if equipment breaks down.
There are clauses covering several other situations that you might want to get protection for, so speak with an expert to decide what is suitable for you.
Getting An Unsuitable Tenant
The final risk is one that can make your rental business extremely complicated if you get it wrong. That’s because a poor tenant who doesn’t pay on time, who damages your property, or who leaves unexpectedly without giving you any notice can lead to you losing money.
It makes sense to do a background check on anyone who wants to rent the property. This means looking into their credit history, details of their full rental history, and whether they have a criminal record.
You can also verify the person’s current employment status and get a risk score and recommendation that gives you an overall view of whether they’re a good choice of tenant.
You can’t always avoid problems with your tenants, but being thorough in your investigations gives you the best possible chance of avoiding any major issues with them.
Drawing up a professional contract for them to sign then gives you the final degree of comfort that you need to go ahead with confidence.
These risks all need you to spend some time on them to avoid them turning into major problems. By doing this well, you can make