A healthy real estate portfolio is one of the keys to true long-term wealth. Even a sole single-family rental can completely change your financial outlook. As much as you may see the upside with a rental, there are a handful of negatives that can be difficult to ignore. There is no question that if you get involved in the wrong property, with a bad set of tenants your experience will be a negative one. However, for every negative story from a disgruntled landlord there are five others who have been positively impacted by a rental property. You can’t let the potential of a negative influence your decision to actively look for a rental. Here are the five biggest fears of rental property ownership.
- Losing money. Losing money is the single most common fear of any real estate investor. You may have heard one isolated story of a fellow investor losing their shirt and can’t get it out of your mind. The reality is that losing money is a part of any business, but often the exception rather than the rule. For you to lose money with a rental property you need to completely misread the market, the cost of repairs and the property. There will usually be a large ticket, unexpected repair that catches you off guard and changes the financials of the property. Even if this occurs you have years of ownership to make up for it. Sure, you will outlay money in the short term but if you view the property as a long term hold you will be able to recover. Losing money on a rental takes a series of unfortunate events that can happen, but the odds are certainly against it.
- Evictions. Just the thought of an eviction can make you think twice about pursuing a rental property. Dealing with an eviction is time consuming, expensive and exhausting. However, they are much less frequent than you may think. No renter plans on getting evicted. An eviction is a stain on your credit and leaves the renter without a place to live. Sure, there are a handful of “professional tenants” who bounce from property to property, but they are certainly the exception and not the rule. In most cases, an eviction is caused by a lack of due diligence. Instead of following up with references, pulling credit and calling previous landlords you rush a tenant into the property just to fill a vacancy. Inevitably, at some point during the lease they stop paying and soon after they are evicted. Proper tenant screening can’t completely prevent every eviction, but it goes a long way.
- Constant tenant issues. Somewhere along the way tenants have gotten a bad rap. There is the thought out there that most tenants are bad. This could not be further from the truth. The reality is that there are more tenants now than ever before. With loan guidelines still difficult and home sales stagnant, prospective buyers are staying put. This has further increased the pool of renters to the market. Many of these renters are young professionals who have never rented before and don’t know the basics of a house. As the owner, you can’t expect an increase in phone calls, texts and emails but nothing too time consuming. There is a thought that some tenants constantly harass their landlord and make their life a living hell. Those landlords that complain probably don’t take care of their property the way they should. The tenant may simply be asking for a lock to be changed or the dishwasher fixed. These requests are not unreasonable and should be tackled as soon as possible. Tennant issues are not a constant struggle that should dissuade you from being a landlord.
- Reduced equity. Owning a rental property should be viewed as a long-term acquisition. There are many investors who are scarred from the mortgage collapse over a decade ago. In the matter of just a few weeks their property value dropped in some cases close to 40% and their tenants suddenly stopped paying. That can happen again but that was widely viewed as a once in a lifetime occurrence. There was a perfect storm of influences in the market that all came together at once. Property values are nothing more than an estimate of price at a given time. Unless you are planning on selling or refinancing the current value should not be a consideration. Look at the value of your home in five, ten or twenty years down the road when you are ready to move on. Values will certainly rise and fall during that time, but it is nothing to keep you from buying.
- Negative cash flow. There are many rental property owners who use their cash flow to supplement other areas of their business. The extra couple hundred dollars a month helps with marketing, paying down debt or saving for repairs. The thought of losing this, or even coming out of pocket every month keeps some prospective buyers away. As scary as negative cash flow may be it is usually a byproduct of shoddy numbers. You should be able to estimate long term cash flow if you account for all the hidden costs, repairs and prospective issues. If you go into the property with rose colored glasses on, expecting everything to be perfect you will inevitably come up short with your projections.
There is risk in every area of real estate. With rental property ownership the risk is often worth the reward. Don’t like the common rental fears keep you from exploring the market.
Blog post courtesy of CT Homes, LLC.