Rental properties are investments and very powerful ones at that. But like any other form of investment, they come with risks. And the best we can do is take these sorts of investments and make them as low-risk as possible under the circumstances.
You’ll make more impressive and more reliable profits if you put in the effort to minimize the risks that your rental property faces. Here are a few such risks, along with what you can and should do to minimize them.
Natural (and unnatural) disasters
We build homes and other buildings in order to shelter ourselves, our valuables, and our businesses from the elements. But Mother Nature isn’t so easily kept out: a powerful flood, fire, tornado, earthquake, or other natural disasters could be more than a match for your home or rental property. And that’s to say nothing of the less natural risks that your property faces. Faulty electrical work could start a fire in your space, for instance, and plumbing issues might lead to floods.
We’ll talk more about avoiding serious problems with your property’s systems in just a moment, but first, let’s discuss the ways in which you could reduce the financial dangers of major disasters on your property. Homeowners should always have homeowners insurance; as a landlord, you need to be fully insured, too. Take a careful look at your landlord insurance policy and make sure there aren’t any gaps.
Another important step you can and should take is to speak to an attorney about setting up your real estate investments as a business or other type of legal entity. With the right structure, you can better insulate your personal finances from those of your investments and business interests.
Deterioration and depreciation
Income properties are valuable for two reasons. The first is that, like any other type of real estate investment, income properties can increase in value over time. Ideally, the real estate market will improve and you will build wealth. If you later choose to sell your property, you could make a profit. The second reason is the more immediate income you receive because you profit from rent when you have a great tenant on your property.
But both of these forms of value rely on the condition of your property. If you allow your space to deteriorate over time, it will get less valuable, not more. And if you leave your space looking terrible and functioning poorly, you won’t get the class of tenant that you need in order to make serious money from your income property.
To reduce the risk of your property losing value, you need to invest regularly in preventative maintenance. Replace old appliances (it will likely be tax-deductible anyway) and rely on professionals to make sure that your electrical, plumbing and HVAC systems are up to snuff. You’ll better preserve the value of your property and attract a better type of tenant. You’ll also reduce your risk of fire and flooding problems.
There’s one more risk for us to talk about here, and it’s a big one: the risk of a problem tenant. An income property that relies on rent in order to generate income will need a tenant, of course. But if you get the wrong sort of tenant, they could end up losing you money instead of making you money.
Why? Well, let’s start with the obvious: your tenant could stop paying rent. Eviction is a pricey and drawn-out process, and that can be a real problem. And even rent-paying tenants can be costly if they’re not diligent about keeping their space clean and maintained. After all, their space is your space, and long-term problems caused by unclean spaces and mistreatment will cost you.
To reduce your risk of a problem tenant, you simply need to invest in background and credit checks. Fortunately, this isn’t tough to do. A reliable landlord software solution will include your tenant screening report free. Such software will also help you develop an attractive listing for your property online, which is where modern renters tend to look for their next home.