Owning a rental property comes with benefits like monthly income, positive cash flow, etc. But like everything, owning a rental property comes with a few risks.
4 Risks of Owning Rental Properties
1. Vacant Property
One of the significant threats of having a rental property is property vacancy. Long vacancy can result in negative cash flow. Besides, if you’re planning to purchase the rental property with a mortgage, property vacancy will lower the return on investment.
To mitigate this risk, you’ll have to make sure your rental property is in a good residential neighborhood, i.e., in close proximity to amenities like schools, transportation services, shops, pubs, etc. Besides, while buying the rental property, you’ll have to consider the crime rate and overall security. Because a safer neighborhood will attract more tenants, which means there will be less chance of your property going vacant for a long time.
2. Bad Tenant
If you choose a bad tenant for your rental property, you’ll have to face similar troubles as having a vacant property. For example, if your tenant doesn’t pay the rent regularly, it’ll be like having a vacant property, and you’ll have a hard time paying your mortgage. This will eventually affect your cash flow and slow down your ROI.
Again, if the tenant commits some serious criminal offense or is involved in anything illegal on your property, law enforcement agencies can close your property for months to investigate the crime scenes, which means you won’t get any rents during that period. That’s why before selecting a tenant, you’ll have to thoroughly check the background of the tenant. Also, check the income statement and credit ratings. Besides, ask for at least two references before selecting the tenant.
Some property owners ask for deposit money before renting. You can do this as well. And finally, trust your gut feeling while selecting a tenant for your rental property.
3. Purchasing Property at the Wrong Time
Generally, people purchase rental property to generate monthly income through rents and profit by selling the property at a high price. But if you purchase the rental property at the peak, you’ll have to pay a lot more than the usual price.
As the real estate market is always fluctuating, there is no guarantee that you’ll profit while selling your property. Besides, if you purchase a rental house at a high price, the chances of gaining profit will be thinner. That’s why you should never purchase a rental house in the seller’s market. Because in the seller’s market, buyers have limited power of negotiation.
As I mentioned above, the location of the property directly impacts the occupancy rate and ROI. If you purchase your rental property in a lower-income area, the chances of burglary will increase. As a result, tenant turnover will increase and may cause negative cash flow. That’s why when purchasing property, always avoid dodgy neighborhoods. Instead, go for the safer communities, where the crime rate is low.