Property investment has the potential to be profitable, secure, and even personally rewarding. In theory, you’ll get a good price on a property, charge rent that covers your monthly mortgage payment (with a little extra to claim as profit), and eventually, you’ll sell the property for more than you paid for it.
However, there are a number of things that could go wrong. You could end up owing more money on the mortgage than you have coming in from tenants. You could get stuck with repairs that amount to more than you paid for the property. Or, you could end up with a problematic tenant who makes the situation almost unbearable.
Fortunately, there are some strategies you can use to mitigate your risk.
Decreasing Risk
If you’re just getting started with property investment, use these strategies to lower your risk:
- Choose the right property. The first step is the most important, and it happens before you ever buy a property. You need to choose the right property to invest in—and there are many things to consider. For starters, you’ll need to choose a property in a neighborhood with a good reputation, with property values expected to rise. Not only will this help you find better, more reliable tenants, it will also ensure that the value of your property rises enough for you to turn a profit when selling it (even if that’s many years from now). Properties in good school districts, with low crimes rates, and rising economic opportunities are good bets.
You’ll also want to choose a home that will allow you to become cash positive on a month-to-month basis, and for that, you’ll have to do some math. Find out what you’ll owe on the mortgage, then look at other properties in the area to determine a fair rent price. Will you be able to earn more income than you spend in mortgage costs?
- Don’t try to flip a house (unless you know what you’re doing). Flipping houses sounds like a foolproof plan; you’ll buy a house for a low price, spend some time fixing it up, then sell the home for more than you paid for it. However, this strategy rarely works out as well as intended. If you pursue it, you’ll likely find yourself investing more time and money than you originally budgeted, and you’ll spend time that the profit you make won’t justify. Unless you know what you’re doing, having experience with flipping houses or working with someone who does, stay away from this.
- Finance what you can afford. Few people have enough cash to buy an investment property outright, so most people will need a financing option. Since this will likely be a mortgage in addition to the mortgage you have on your home, think carefully about how much you can afford. Don’t assume that you’ll always have income from tenants to cover the cost; there will likely be months between tenants where you won’t have income trickling in. Do you have enough outside income to get by? How long of a grace period will you have to work with? Don’t buy a house that doesn’t fit into your budget.
- Screen your tenants carefully. Screening your tenants thoroughly mitigates your risk in several ways, even though it does take more time than it would to bring in the first tenant applicant you encounter. Screening helps you find the most reliable tenants—the ones who will pay rent on time, every month, and the ones most likely to stick around for months or even years. It will also lower your risk of acquiring problem tenants, who may cause property damage or even force you to go through with a messy eviction.
- Keep your tenants happy. If you want to ensure your revenue is uninterrupted, make the extra effort to keep your tenants happy. If they’re struggling to pay rent on time, give them a few extra days or a one-time discount. If they complain about a repair that needs to be addressed, take care of it right away. Send them holiday cards and chat with them when you have the opportunity; these little touches could keep your rental property occupied for several months longer than it would be otherwise.
- Stay on top of updates. You can also keep your property in top shape, prevent the onset of bigger problems, attract better tenants, and improve your property value by regularly updating your property. Between tenants, make sure you conduct a thorough home inspection, and take care of any issues you notice proactively. You can also build new additions, paint the walls, and make other superficial changes that make the property more attractive during this time. It’s unlikely your property will lose value if it’s well taken care of.
- Hedge your bets. Finally, if you want to make sure you earn a profit and it’s within your financial power to do so, consider hedging your bets. You could invest in multiple properties at once, in different areas, to protect yourself in case demand for one area suddenly drops. You could also hedge your bets by enlisting the help of a property management service, which may be able to help you make better decisions (and spend less time on your property).
Nothing Is Risk-Free
There’s no such thing as a sure investment. Whether you’re investing in property, stocks, or anything else, there’s always a risk that you won’t see a positive return. Don’t let that stop you; as long as you put in the work and the research, property investing can and should be profitable for you.
If you find yourself overwhelmed with the possibilities, or just want to make the property management process easier, consider using property management services like those offered by Green Residential. We’ll make sure your property remains in top condition so you don’t have to worry about the little things that might go wrong.
Michael is Green Residential’s Vice President. He helps to keep the team organized and running smoothly. Prior to joining Green Residential, he spent 12 years working at Cadence Bank in the mortgage loan servicing department, where he specialized in loan audits, modifications, and bankruptcy-related issues for the mortgage portfolio.
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