Have you ever been called a “control freak”? We don’t always use this as a term of endearment, but with investments, it may pay off.
No investment is risk-free, but real estate gives you an element of control that others don’t. You not only choose the specific house, but you also decide the location, the amount you want to invest, the upgrades, the tenants, and the lease terms.
Of course, you don’t have control over the housing market in general, but you have just as much info available as you would about stocks.
As long as the property cash flows, you’re usually okay, even in a bad market. During a recession, rents typically rise because fewer people can buy houses and more people are renting. No, you can’t control the market, but cash flow properties generate income in any market.
Plus, you get more than an email or certificate confirming your purchase (ahem, stock market) — you buy an actual house with floors, walls, and a roof. It’s a tangible investment.
The Biggest Risks of Real Estate
But there are still some risks in the real estate investment world — specifically in your personal, professional, and purchasing approach. In your real estate risk management, here’s what to consider.
Purchasing Risks
Buying and Hoping Is NOT a Strategy
Buying a house in hopes it’ll skyrocket in value is a gamble — not a strategy. If properties have gone up 7% every year, and you buy hoping it’ll jump another 7% so you can sell for profit, you’re taking a big chance. If the market drops, so will your investment.
Buy for Cash Flow
Instead, buy for cash flow. People need a place to live — even in a down market. So, if you buy a house for cash flow, you’ll keep making money regardless of how much the house is worth. Even if the house is worth half as much tomorrow, you’re still collecting rent. And over the long term, real estate values rise. If you can hold the property while the market is down and keep collecting rent, you can’t lose.
This happened to me a few years ago. I was ready to sell, but the market had dropped too much. I was going to take a $15,000 loss. Fortunately, I bought for cash flow so I could afford to hold the property since it was paying for itself. Two years later, I was able to sell it for a $60,000 profit. If I had bought it wrong, I’d have been in a much tougher position. I’d have taken a loss each month, needing to cover the mortgage and other expenses. But since it cash flowed continually, keeping the property until the value rose again was painless.
Personal Risks
There’s no denying it — managing property takes time and can be stressful. If it’s not your full-time job, it’ll demand attention after your day job. Plus, there’s the stress of dealing with tough situations and the stress of not knowing what actions to take — both with tenants and landlords. The amount of time and stress just depends on your knowledge, availability, and personal preference.
Risks With Tenants
As a landlord, you have to be aware of the law and how to address lease violations. There are certain things you just can’t do — even if they seem like common sense.
For example, I had a guy who called me and said, “Hey, my tenant’s not paying, so I went out there yesterday and changed the locks. I want you guys to manage my house.” He was already in violation of the lease. You cannot change the locks on a tenant without following procedures. So we immediately gave the tenant a new key and then worked from there.
If you don’t handle a situation legally, it can be a costly and time-consuming mistake.
Risks With Contractors
Dealing with contractors is one of the most challenging parts of property management. When a maintenance issue comes up, you need to be aware of fair pricing. If you’re not, they may take advantage of that.
Plus, you need to make sure contractors complete the job to your specifications and that those specifications are documented. Just recently, we had a contractor complete a $10,000 job for a client. But the owner wasn’t pleased with the ceiling fan replacements. In fact, he was so mad, he was ready to sue us and the contractor. Fortunately, because of our relationship with the contractor and the documentation, we were able to work it out.
Landlords, only hire insured or bonded contractors. Otherwise, even a small mistake can cost you thousands. We had a painter who dropped a can of red paint on wood floors. We had to replace the entire kitchen with new wood floors — which his insurance covered. If our painter hadn’t been insured, we would have been out $6,000 in floor replacement, and liability insurance doesn’t cover that.
How to Reduce Your Risks
Not interested in the stress, time, legalities, and repairs that come with owning a rental property? A property manager reduces these real estate risks to almost nothing. They handle the after-hours phone calls, maintenance, and tenants — some even help you find the right house with a solid cash flow if you’re looking to buy.
Learn more: Should You Hire a Professional Property Manager?
But if you know what you’re doing, have extra time, and enjoy it, it can be great. If not, that’s where a property manager can come in. It’s a trade-off — do I have the knowledge and availability to manage my investment or would someone else be more equipped to do it for me?
