The stories surrounding the lucrative potential to receive passive income—through rental properties— is enough to excite any potential investor. However, the increase in the amount of people owning a vast selection of rental properties, but filing for bankruptcy, has left me with a dual opinion regarding rental properties (especially during the downturn). We know that investing in real estate is a smart move, but is it really as safe as people make it out to be?
Investing in rental properties appears to be a promising endeavor. Often, it is the type of investment strategy that can help generate a significant amount of passive income, offer tax breaks, and appreciation on the value of a home or property. On the flip side, there are many hidden costs that people are initially unaware of; not to mention a lot of unknown risks factors at play. An investor must consider additional complications that can include headaches with a mortgage, taxes, insurance and upkeep of the property, among other scenarios.
While the majority of individuals are aware of the advantages of property investment— such as a consistent flow of passive income and property income growth— many fail to remember the costs associated with rental properties. Therefore, in order to increase your awareness and knowledge of real estate investing, here are three property costs that one should always anticipate before taking the first step to becoming an investor.
While the possibility of earning additional passive income sounds wonderful, I need to remind you that simply buying a property, and then renting it out is not the end of your work. It will take a lot of effort to continue maintain the property and to keep up with repairs. This is absolutely critical to note; as small issues in an investment property may eventually lead to bigger situations if ignored or unresolved.
In addition, if you are unfortunate enough to meet some big ticket item repairs (i.e. a furnace coming under fire unexpectedly...did you see my play on words?), it potentially could destroy your positive cash flow for the entire year. This is especially true if you are utilizing leverage; the concept of using borrowed capital to maximize returns. The truth is, these unanticipated expenses may end up being out-of-pocket expenses, which is not ideal or desired.
Renters From Hell
I don’t think that I even need to say this, but here is a short reminder anyway: there are no guarantees surrounding tenants. So, even when the most seemingly amazing renters inhabit your rental investment, receiving payment is never a 100 percent guaranteed fact. Perhaps, you will be lucky enough to discover one wonderful renter who consistently pays on time, month-after-month. Even so, home renters are like a clock; you never know which day they will stop ticking.
There is no doubt that there are some renters out there who have a plethora of excuses as to why they cannot pay what they signed up for paying. This ordeal for an investor ends up being a big headache. The time spent on evictions, along with the money lost from unpaid rent, will surely cause major frustration.
As an investor, you have the option of investing along the spectrum of property classes; low-income, midrange, and upper-class investments. Depending on where and when you invest, this changes your degree of risk regarding receiving rental payment. It’s important to remember that although you can minimize your risk, the risk with renters paying on-time-every-time can never be completely eliminated.
Additional Costs & Expenditures
With every property investment, there are inherent costs that include homeowners’ association fees, property taxes, and insurance expenditures. These costs occur whether there are tenants residing in the residence or the space remains unoccupied. While the costs mentioned probably come as no surprise— as you have probably been warned about taxes, fees, and insurance expenses in advance— it will cut deep into your pockets. Not to mention, if you do NOT have a steady income coming from renters, these investment expenses (which, by the way, can be quite significant) will definitely get personal.
The truth is, there are risks associated with almost everything in life. Do not let the simple fact that risk exists dissuade you from making the leap and being an investor. Real estate can be a very lucrative choice and successful avenue to build wealth for those who determine to be informed and educated.