Investing in real estate is generally recognized as one of the best paths to building wealth. It enables you to leverage whatever financial resources you have at your disposal to expand your income and increase your net worth, sometimes even exponentially.
But it doesn’t come without risk. Unless you can find a way to lower and even neutralize the risks, you could end up doing yourself more harm than good.
Six Ways to Lower Your Risk
If you’re a real estate investor and landlord, you can adopt several specific practices you to moderate the odds of legal or financial destruction. Here are six of the best suggestions we can offer you.
1. Always Invest for Cash Flow
When you invest in real estate, there’s typically just one thing you care about: cash flow. More specifically, you focus on cash flow in relation to your ROI. Anything else is a distraction.
You should never make an investment decision based on future appreciation. Although the chances are good that an attractive property will appreciate in value as the months pass, you cannot know that for certain. The one thing you need to ensure is to create a steady flow of income month after month.
If you’re at all unclear about why cash flow is more important than appreciation, recall the 2008 recession, when there was a 27.42 percent drop in the Case-Shiller Home Index. Rent prices, however, remained steady.
Rentals largely flat-lined for a couple of years before starting to rise again in the second decade of this millennium. When you invest for cash flow, you typically don’t have to worry about any dips in the market.
You’ll be fairly insulated from recessions and other economic surprises.
2. Be Conservative with Your Numbers
When you run your cash-flow calculations on a potential investment property, always try to stay conservative with your numbers. Round up and include a cushion in the total calculation.
For example, if you believe expenses will come to roughly $325 per month on a unit, it’s safer to assume it’ll be $400. Similarly, if your investigation of the local market suggests your vacancy rate will be 8 percent, you might want to set it at 12 percent.
When you run your numbers conservatively in this way, and you can still find meat on the bone, then you can take that as a strong sign you’re going to be a success.
3. Avoid Low-End Rentals
When you start into real estate investing, you may experience a temptation to invest in low-end rentals. After all, they’re cheap, require a smaller down payment, and will typically look pretty smart on paper.
But it’s all too easy to forget that low-end rentals usually feature much higher carrying costs than newbie investors are apt to anticipate. When you invest in a low-end property, you’re more likely to encounter high vacancy rates, demand for lots of repairs and maintenance, and possibly even expenses that relate to break-ins, vandalism, and “professional tenants” who know how to game the system.
It’s better to step up your search a notch and look at middle-class properties, even if the cash flow appears unpromising on paper. The ROI will almost always be higher in the long run.
4. Don’t DIY
When you’re a newbie investor who’s looking to maximize cash flow and generate a healthy ROI, you might presume you will come out ahead if you do everything on your own. Although there’s nothing inherently wrong with the DIY approach, it’s not likely to be the best use of your time, energy, or resources.
There’s really no sense in managing your own rental properties when you could hire a property manager to do everything for you. Not only would this free up hours of your time every week, but it ensures you won’t make costly mistakes as a result of your lack of experience.
5. Master the Art of Tenant Screening
If we assume you have a good property that provides decent cash flow, the next substantial challenge is to find the right tenants to place in your property. In other words, you want to be competent at tenant screening.
This process takes time (and features added costs), but it’s worth it. If you don’t have the resources to do all of it properly on your own, let the property manager handle this part of the business.
6. Get Good Insurance
Make sure you have excellent insurance. A general landlord insurance policy is always a good idea. But in addition to that policy, you may also want to look into other options like general liability insurance, errors and omissions insurance, and an umbrella policy.
Become a Successful Landlord
In order to be a successful real estate investor and landlord, you must have a plan. And though the effort will not always be easy, with the right approach, you can enjoy less stress, lower risk, and greater profits.
Keep these suggestions in mind and continually watch for ways to improve!