This article is written with the novice real estate investor in mind. Real estate investing offers the opportunity to receive a rate of return that is much greater compared to government bonds, CDs, savings accounts, and even the stock market. However, great care must be taken to minimize the associated risks. Most new real estate investors begin with residential rentals, so that will be our main focus.

Overview of Risks

One risk is the failure to understand the ins and outs of the local market. Believe me, you do not want to invest in a deteriorating area, or one that is riddled with crime. Therefore it is important to develop a working relationship with a reliable realtor, who has an intimate knowledge of the rental business in your local area. Not only will the realtor’s knowledge help you get started, but if you develop a good rapport with him he may be willing to give you a discount off his commission rate, or even get into the habit of giving you the first look whenever a suitable property comes on the market.

The second major risk is over-valuing a property. The last thing you want to do is overpay, as constant negative income will doom you to failure. It is no longer possible to rely on inflation of property values to show a profit. Thus, you must analyze each property to make sure the expected rental income will cover mortgage payments, maintenance, insurance and all operating costs. Also, be conservative in your estimations, and remember to account for a 20% vacancy rate.

Additionally, before purchasing the property, have it checked by a building inspector. This will help prevent unanticipated major repairs that could devastate your budget. Check with the city zoning department to be sure the building is in compliance with all zoning ordinances. See if there are any zoning ordinances that will interfere with your improvement plans.

The third risk is that you wind up hating being a landlord. This is definitely a risk because it is best to manage the property yourself, and being a landlord can be time-consuming and stressful. You’ll need to select the renters, collect the rent, and coordinate maintenance and repairs. Doing most of the management yourself can greatly lower operating costs, but again it is not for everybody.

Minimizing the Risks

In addition to what has already been mentioned above, there are a few other things you can do to minimize your risk as well. For example, do not sign any documents such as mortgages or contracts without the assistance of a lawyer. Also, make sure your rent is appropriate for your local market. If your rents are slightly lower than the market, your occupancy rate should be above average, because your tenants will not be looking for a cheaper rental. Also, carry adequate insurance coverage (including a sizable liability policy), screen tenants thoroughly, and collect the maximum security deposit allowed by your state’s landlord-tenant laws.

Conclusion

Investing in rental properties clearly comes with some risks, and the 3 primary risks listed in this article are just the tip of the proverbial iceberg. Just follow the advice in this article, and use some common sense, and you should be fine. Although following the tips in this article will certainly not eliminate all investment risks, they will increase your chances of success. Good luck!

Author Bio: Visit free-rental-property-investing-info.com for free tenancy agreements, tools, and no-nonsense educational info focused solely on rental property how to. Peruse topics like buying and selling, managing property, rental property tax, and much more.

Category: Real Estate
Keywords: real estate investing, rental property, investment property