Real estate investing offers incredible career flexibility, as well as wealth-building opportunities. But for all of the incredible upside, we would be remiss to gloss over some of the risks associated with tenant-occupied investment properties. And by proactively addressing them, you can reduce your risk of getting exposed.
6 Surefire Ways to Reduce Risk
No two real estate investments are the same. But with the right approach, you can simultaneously protect your downside and maximize the upside. Here’s a look at some practical steps to take:
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Buy the Right Properties
You make your money when you buy. If you invest in the wrong property – or pay too much for a good property – you’ll spend years trying to make up for it.
What makes a good property? Consider:
- It should be reasonably priced, with enough room in the monthly cash flow to provide a healthy return on investment.
- The property should be located in an area that’s trending in the right direction. You don’t have to buy in the nicest neighborhood in town, but you do want to make sure the neighborhood isn’t actively declining.
- The property should be attractive to a large pool of renters in the area. Think about square footage, number of bedrooms, and comparable properties within the same price range. (If all rental properties have updated kitchens and the one you’re buying has an outdated kitchen, it’ll need to be renovated in order to rent competitively.
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Hire a Property Management Company
As a landlord, there’s so much to think about. From big-picture strategic responsibilities to the dozens of smaller tasks that must be completed on a weekly basis, it’s easy to feel overwhelmed. And when you feel overwhelmed, you’re more likely to make costly mistakes.
Hire a full-service property management company to take care of everything on your behalf. These services aren’t always cheap, but they offer a robust long-term ROI.
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Put Everything in Writing
There are states where oral statements and agreements are legally binding. However, even in these states, it can be hard to prove that one person’s statements are true and another person’s words are false.
In an effort to avoid any and all disputes and misunderstandings, you must get everything in writing. Furthermore, you should create multiple copies and provide one to your tenant via email. (This gives you a way to track the correspondence and confirm delivery.)
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Get the Right Insurance Policies
You can do everything within your power to reduce risk, but there are certain factors you have no control over – like natural disasters. The right insurance policies can keep you insulated against the threats that are beyond your sphere of influence.
Carefully consider some combination of the following policies: property protection, liability protection, personal property protection, rent loss protection, acts of nature protection, and flood insurance.
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Carefully Screen Tenants
Anything you can do to strengthen your screening process will pay dividends over the life of the tenancy.
Most landlords understand the importance of asking for proof of income and running a background check but don’t underestimate the significance of calling current and past landlord references. A fellow landlord will shoot you straight and, in some cases, can prevent you from syncing up with a risky tenant.
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Maintain an Emergency Fund
Every rental property you own should have its own bank account. And inside each individual account, you need a cash emergency fund of at least three months of expenses. (It’s better if you can accumulate enough cash to cover five or six months.) This ensures that even in a worst-case scenario when there’s no rent coming in for an extended period of time, you still have the cash to keep things afloat.
You can use your emergency fund to pay for emergency expenses but always refill the fund as quickly as possible. (Take a portion of the next rent check and use it to backfill the account.)
Set Yourself Up for Success
Reducing risk is only half of the battle – but it’s a necessary component in the larger equation. By protecting your downside, you’re able to confidently focus on adding value, growing, and generating results (rather than constantly looking over your shoulders and worrying about what might happen).
Which principles will you implement as you move forward in your real estate investment career?
