Real Estate Investment Risks and How to Mitigate Them

Introduction

Are you considering investing in residential rental properties? While real estate can be a profitable venture, it’s important to understand and manage real estate investment risk.

Before entering the real estate market, it’s important to ask How Risky Is U.S. Real Estate Investing, Really? By being knowledgeable and proactive, you can assess and quantify the risks involved, make smart decisions to reduce them, and maximize your investment success.

In this article, we will explore the real estate investment risks and provide practical insights and strategies to mitigate them. Maverick Investor Group has been helping our clients buy turnkey residential investment properties since 2007, so we are here to help you navigate the market with confidence and minimize your downside risk. Let’s dive in!

Is Real Estate a Safe Investment?

Investing in rental properties can be both profitable and stable but, like all investments, it is not without risks. By understanding the specific risks involved and implementing proper mitigation strategies, you can minimize the potential downsides and increase your chances of success.

What are Some Specific Property Risk Examples?

There are various risks associated with residential investment properties. Here are some common property risk examples you should be aware of:

Vacancy Loss: Rental properties can experience periods of vacancy, resulting in lost rental income. Understanding rental demand and choosing properties in high-demand areas can help mitigate this risk. Also, closing on “turnkey” properties with a tenant already in place can eliminate your up-front vacancy loss. But, if you hold over the long term, tenant turnover and vacancy loss is an inevitable expense, so just expect it and factor it into your cash flow analysis from the start.
Market Value Fluctuations: Real estate values can fluctuate due to economic conditions, market trends, or local factors. Being aware of market dynamics and investing in growth markets can help minimize the impact of these fluctuations. Most importantly though, if you buy right and hold for the long term, then you should make your money when you buy and not need to speculate on home prices at all. If you close on a turnkey property, you can just collect your positive cash flow every month, take your tax benefits, let your tenant pay down your mortgage, and not worry about short term home price fluctuations because they don’t affect you at all!
Maintenance and Repair Costs: Property maintenance and repairs can eat into your rental income and reduce profitability. Buying a turnkey property that is either new construction or fully renovated—including a new roof, new HVAC and new hot water heater—will drastically reduce both your capital expenses and your maintenance in the early years of owning the property. But if you hold of the long term, some level of maintenance is inevitable, so just expect it and factor the estimated expense it into your initial cash flow analysis from the start.
Tenant Risk: Finding reliable tenants is crucial for a successful rental property investment. Be sure to hire a good property manager and get a qualified tenant who will take good care of your property. A professional property manager should conduct thorough tenant screening on your behalf, including background and credit checks, and seek previous landlord references, to ensure you get a tenant that will treat your property well. Finding a stable tenant that will stay in your property long term and continue renewing their lease year after year helps to reduce your tenant turnover, which helps minimize both your maintenance and vacancy costs.
Regulatory and Legal Risks: Landlord-tenant laws and regulations vary by jurisdiction. The professional property manager you hire should know the local laws and ensure they comply with all of them on your behalf. One of the key factors in identifying the Best Real Estate Markets is understanding which states are “landlord friendly”, so your risk is reduced in the event that the tenant defaults on the rental payment. The other reason to hire a high quality property manager is because they know exactly how to efficiently handle tenant default scenarios and eviction scenarios if they arise.

The Impact of Location on Property Risk Assessment

The location of a rental property plays a significant role in property risk assessment. Investing in properties in desirable neighborhoods with strong market fundamentals—such as low crime rates, good schools, and access to amenities—can reduce risks and attract high-quality tenants. Owning rental property in majority-owner-occupied neighborhoods helps with pride of ownership and provides a built-in exit strategy when you want to sell to a primary-resident on the retail market down the road.

Best Practices and Strategies For Low Risk Real Estate Investing

To maximize the stability of your rental property portfolio, as well as your overall return on investment, consider these best practices and strategies for low-risk real estate investing:

Diversification: Building a portfolio of multiple properties across different markets can help minimize risk. It diversifies your macro market risk by being in different cities and it diversifies your micro-market risk by being in different neighborhoods. It also mitigates your downside risk of vacancy loss by having multiple ‘doors’, which means multiple streams of income from multiple tenants. If you only own one property, and it goes vacant, you have 100% vacancy. If you own ten houses and one goes vacant, you only have 10% vacancy across your portfolio. So, by having a diversified portfolio, you are less reliant on the performance of a single property.
Thorough Research and Due Diligence: Conduct extensive research on the market, location, and property before making any investment decisions. Consult local property management companies to ensure you know the fair market rent, the level of tenant demand, and which way it is trending. Get an appraisal to confirm the fair market value of the property. And always get a professional home inspection on the property, and then ensure any final punch list items that you agree upon with the seller are completed before closing.
Set Aside Reserves: Remember to factor in assumptions for your variable expenses like maintenance and vacancy. Set aside reserves so that when they occur, you will be prepared.
Get Insurance: Be sure to get hazard and liability insurance on your property (and factor that expense into your cash flow analysis).
Hold your Property in a Separate Legal Entity: Holding your property in an entity (an LLC is the best for most people) helps to reduce your personal liability. Be sure to seek legal guidance, set it up properly, and follow all of the corporate compliance requirements.
Get Great Property Management: Engage professional property management services to handle tenant screening, rent collection, property maintenance, lease renewals, late payments and evictions. This can help reduce the burden on you and ensure the most efficient and legally compliant management of your investment property.

Helping You With Real Estate Risk Management

Maverick Investor Group specializes in helping people like you buy turnkey residential investment properties in out-of-state markets. Our website provides a wealth of resources, and our experienced team works with you one-on-one to assist you in identifying the best markets for you, analyzing properties, and implementing real estate risk management strategies. Schedule a free video consultation with Maverick Investor Group below to get all your questions answered and learn more about how we can help you achieve your real estate investment goals:

Schedule a 1-on-1 Video Consultation with Michael

Hey, I’m Michael, the Investment Property Specialist at Maverick! I’d love to get to know you personally and understand your real estate investing goals so I can help you to achieve them! On this consult, we can talk about your buying criteria, get all your questions answered, and develop a real estate portfolio building strategy that is right for you.

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Conclusion

Optimizing Your Property Risk Management

Investing in residential rental properties can be rewarding, but it's important to be aware of the potential downsides and take informed, pre-emptive steps towards property risk management. By buying in the right markets, getting the right insurance, conducting thorough due diligence, hiring world class property management, and working with a professional team of experts by your side, you can navigate the real estate market with confidence. Since 2007, we have been educating and empowering our clients to make smart investment decisions and maximize their success. Start your real estate investment journey today and unlock the potential of this lucrative asset class. Schedule a free video consultation with Maverick Investor Group.

DISCLAIMER:

We are not a tax professionals, this is not tax or legal advice, and tax laws are constantly being changed and revised and may change the day after you read this. So, this is for informational purposes only, and it is your duty to consult with your own tax professional about your individual situation and the most updated applicable laws before attempting to implement any of the content in this post.

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Real Estate Investment Risks and How to Mitigate Them

Introduction

Is Real Estate a Safe Investment?

What are Some Specific Property Risk Examples?

The Impact of Location on Property Risk Assessment

Best Practices and Strategies For Low Risk Real Estate Investing

Helping You With Real Estate Risk Management

Schedule a 1-on-1 Video Consultation with Michael

Conclusion

Optimizing Your Property Risk Management

DISCLAIMER:

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