You can experience great ROI when owning a rental property. However, the possibility of great returns is balanced by substantial risks. You want to consider the potential downsides and risks before you jump into rental investment. Here are a few of the most common ones:
You could end up with a property that is vacant for an extended time. You may not be able to get new tenants into a property because it is in poor condition, the rent is too high, its location is problematic, or the economic climate is not ideal. During a vacancy, you do not collect rental income and will also have to pay for utilities, HOA fees, and advertising costs. To avoid long vacancies, make sure your investment property is located in a safe area that is near parks, school, grocery stores, and employers. Also be certain that your rent price is fair.
One key way you can control maintenance costs (see below) and prevent vacancies is through strong tenant screening. In order to make sure your renters are as strong as possible, check their credit, income, and criminal records. Make sure you have at least two references from past landlords. Get a security deposit.
Your hope when you purchase is that the area is on the rise – that walkability to amenities will keep getting better and that nearby properties will be properly maintained. However, your investment could become less valuable if the neighborhood declines. Pay attention to the local climate and to politics in the area to mitigate risk.
A tax code that is in your favor will mean you benefit from owning properties. However, you may see an adjustment to the tax code that hurts the benefit you are seeing.
You need to be prepared for any damage to the property caused by tenants that is beyond normal wear and tear. Be ready for small maintenance projects, because the costs of them will add up over time. You may have large costs at times too, although often those unexpected expenses will be handled by your insurance. When you purchase, you can minimize future maintenance costs by looking for properties that are no more than 10-15 years old. Preventive maintenance is also smart.
In any investment, there is risk. Rental property investment is no exception. However, owning properties can yield strong ROI if you are prepared and if you take steps to minimize the potential for setbacks.