Owning rental property can be a great way for you to generate extra income or even build a budding rental property empire. Yet, there are potential pitfalls that might sink your ambitions as well as your bank account. The following are some pointers you can follow to help ensure your success and avoid a business disaster.
One of the worst things you can do is buy a rental property without putting any thought into it or having a plan for ensuring long-term profitability. You must have a plan for maintaining the property, paying taxes and other costs, keeping it filled with good renters, and ensure you can keep it profitable for a long time. Many people make the mistake of thinking they will get rich fast when they buy a rental property to generate income. All too often, the opposite winds up being true, and often times because no plan was in place.
While it might seem easy to make money off rental housing – buy a property for X amount and rent it for Y amount to generate a profit, the rental housing market is much more complex than that. If you choose to go it alone, the odds of success are lower than when you create a team of partners and investors and do your homework before you buy a rental property. One of the biggest causes of failure in the rental property business is when investors pay too much for a property and find out later they can’t generate a profit. You need to do your homework to determine short-term and long-term costs, such as taxes, renovations, maintenance, the state of the local rental market, finance rates on loans, insurance costs, and many other factors that greatly impact the ability to be profitable.
When you own a rental property, you are liable for all repairs that are needed. If the plumbing or electrical are bad, the roof sags, windows break, or many other potential issues, you need to pay to fix them. If you don’t you might find yourself on the bad end of a local lawsuit or governmental enforcement action. Worse, still, you could wind up facing a lawsuit from one or more tenants due to injuries, sickness, or other problems they might experience if you don’t have the money to make repairs and keep the property well-maintained.
The natural tendency is for things for go from an ordered to a disordered state, so once something is built, repaired, or replaced, ultimately, it will need more of the same down the road. While you likely will plan on needed maintenance and repairs, unfortunately, unforeseen costs ultimately will arise, whether it’s a bad water heater, flood damage, or other unexpected costs. To be safe, you are best advised to take your original estimate for repairs and maintenance costs over a period of time and at least double it to provide a margin of financial safety and security when calculating potential profits.
When you get into the rental property business, it’s best for you to obtain as many potentially profitable properties as reasonably possible. All businesses have some level of loss with which they must deal, and the rental business is no different. Fortunately, if you are smart and buy mostly good properties as investments, you can generate a volume of profit that will help to offset marginal or even poor investment risks. Having all of your proverbial eggs in one basket creates a significant risk that volume will offset.
JWB has been providing clients consistent returns for nearly 10 years and has a proven strategy for success. Learn more about how JWB can help you earn positive cash flow on your next property investment.