If you have been contemplating the idea of investing in real estate, you need to know that there are a lot of benefits about that. On the other hand, you need to know the possible risks that come with investing in real estate and how you can prepare to handle that in a very efficient way.
This is the opportunity to learn about the possible risks that you might encounter when it comes to investing in this business and what you can do to mitigate those risks.
What’s the number one fear that most real estate investors have when it comes to investing in real estate? Let’s see the list:
1. Having a bad tenant
In order to avoid this, you should have done the homework way before you even placed that tenant in your apartment. There’s a process called the qualification of a tenant. You have to qualify a good tenant.
It’s like a job application but in this case, you are going to interview the possible candidates to live in your property. A person that is interested in your property has to show you that they’re worthy of living in your place. What most people typically ask is copies of a W2, sometimes also a bank statement just to make sure that they have a consistent income. Most importantly, that tenant will go through a credit check.
- The importance of Credit:
Credit is pretty much the ticket to everything. It’s a ticket for you to get a better job. It’s a ticket for you to get better financing, better interest rates, better credit card rates and the list goes on. If the person is not caring about themselves, what makes you think they’re going to care for your property? What makes you think that this person is going to pay it on time?
In order for them to have good credit, they have to always pay bills on time. They have to pay their credit cards on time.
2. Damages
If you place a good tenant in your property that means you won’t have any damages to worry about. Of course, there’s the usual wear and tear that you’re going to have to fix up when the tenant moves out or even when the tenant is there, things go through the normal course and life and things do break when you use them over time over and over again. That cost is usually very minor.
In the event that something unnatural happens, like a massive fire or a flood or something like that, those damages will be covered by the insurance that you purchased for the property.
If your property catches fire and you need to cash out on that insurance, they’re not going to pay you the value of the property if you didn’t get good insurance coverage.
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3. Vacancy
This shouldn’t be a problem if you do your proper due diligence when it comes to studying the market.
Is there any demand for rentals or do most people prefer to buy in this area? If there is a demand for rental, what type of rentals are those? Are we talking about middle working-class families who just need a good house but nothing fancy or are we talking about higher class?
The best time for a property to be vacant will depend on the market. On average, a property will stay vacant roughly about six weeks. Why? When a property becomes vacant, there’s still some minor things, minor cosmetic fixes that you need to take care of.
After that, you will have enough time to put the property in the market and start showing it to people. You probably will get a ton of offers on day one but it doesn’t mean that whoever candidate shows up on day one it’s going to be the right candidate.
4. Inability to pay rent
It’s very important for you to be sure that you’re qualifying your potential tenants the proper way.
There are regular circumstances. We are currently going through unprecedented times. We are currently in the middle of a pandemic.
There are a lot of people who cannot afford to pay the rent, even people who were qualified before, who had really nice jobs and unfortunately, they are unable to do that. Under those circumstances, that’s when you have to stay informed with everything that’s happening in the market. You can tap into any type of government assistance, whether it’s for you or for the tenant.
5. Volatility
The ups and downs in the real estate market can affect your investment if there is not stability in the economy. The only difference between real estate and the stock market, is that the ups and downs happen a little slower in Real Estate.
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Real estate is not immune to volatility but you have control over that. The first thing you need to do to control the volatility is to study the market before you even invest in it. The second it’s monitoring it. Typically, when you invest in real estate, you will notice that most of the people have an exit strategy.
That leads to monitoring because if you do have an exit strategy, you have to keep monitoring the market constantly. You have to check the news and see what’s going on.
6. Getting a lawsuit
We live in a country where everybody suits everybody. Everybody wants to sue everybody because it’s the easiest way to get rich. First it’s the lottery, second through a lawsuit.
A way to protect yourself is proper maintenance, the other is by protecting yourself and your investment with a good insurance company and the last is by placing your property in a legal entity and that’s going to give you that shell.
Assuming you did the proper due diligence and you place the right tenant, you also have to make sure that you do the proper maintenance. Why? To prevent accidents.
You have to make sure everything is clean. Make sure everything is well-maintained, make sure nothing looks like it’s vacant so that people do not break into your properties.
Having an extra layer of an LLC, it’s going to give you the maximum protection possible. It can also give you the advantages of tax deduction.
7. Investing in the wrong property
You need to buy a rental property. You’re investing in a property. The only deciding factor for you to take into consideration will be the numbers. You should make your purchase, you should make your investment all based on numbers.
What happens if you lose your job? We’re in the middle of a pandemic. A lot of people have lost their jobs, but even in regular circumstances, companies are buying each other out. You could be one of those people who ends up without a job. Imagine you are out of a job. You don’t even have enough money to cover your own personal expenses. You have to prevent this and the best thing is having different plans because in these times, you cannot be 100% sure about anything.
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