In a best-case scenario, property investing can be extremely lucrative. With a sufficiently balanced portfolio of rental properties, you can generate significant monthly cash by collecting rent, covering your expenses, and pocketing the difference. As long as your properties remain occupied and in good condition, this should put you in the positive. On top of that, you’ll benefit from long-term property appreciation as your properties increase in value, provided you invest in the right neighborhoods.
However, these results aren’t guaranteed, and some property investors actively lose money on their investments. There are significant risks associated with property investing, including risks associated with vacancies, losses, and destruction.
How do you mitigate the risks of property investing so you can maximize your potential returns?
Invest in Insurance
Adequate insurance coverage is arguably your best strategic holding when it comes to mitigating the risks of property investing. With a sufficiently robust insurance policy, you can protect your property against many forms of destruction and degradation, putting an artificial cap on the expenses you could incur in a given period of time. It’s true that insurance is going to cost you some money on an ongoing basis, but it’s worth investing in if you want to avoid potentially catastrophic losses.
Work With Experts
Most property investors benefit from working with experts throughout their property management strategy. This includes working with real estate agents, lawyers, property managers, contractors, and other authorities who know what they’re doing in this space. With adequate consulting and mentorship, you’ll be in a much better position to evaluate risks, plan your strategy, and make the right decisions for your property portfolio.
Do Your Due Diligence
Never make a property acquisition without doing your due diligence. Buying a property for any price is a financially significant move, and one that you need to consider fully before moving forward. You should always conduct a property inspection before closing the purchase, you should verify any claimed details associated with the property, and you should look at comparable properties in the area to make sure that you’re getting a decent price.
This will help you avoid purchasing properties with excessive risks, and help you properly account for risks associated with more reasonable properties.
Screen Your Tenants
You should also screen your tenants consistently. That means evaluating your tenants for their propensity to consistently pay rent on time. Criminal background checks, credit score checks, and job verification can mitigate a great deal of risk when it comes to acquiring and retaining tenants, making it a relatively small and obvious investment to make.
Fix Issues Promptly
Issues in real estate can quickly spiral out of control if they’re not addressed adequately. If your roof has a minor leak, it will eventually become a major leak and cause significant water damage. If there are issues with your electrical wiring, they’re probably going to get worse before they get better. Accordingly, you can minimize risks and save money by fixing issues as promptly as possible. This is doubly true if these issues are raised by your tenants, as responding quickly can minimize tenant turnover.
Establish an Emergency Fund
An emergency fund is basically a cushion of cash that serves as a buffer for emergency and unplanned expenses. If you have a robust emergency fund in place, you can tap into it instead of maxing out your credit cards or delving into your long-term savings. As early as possible in your property investing career, you should make it a point to accumulate a sizable emergency fund. Only tap into it when necessary, and replenish it as soon as you can.
Diversify Your Real Estate Portfolio
Diversifying your real estate portfolio can help you balance various risks against each other and increase the stability of your returns. For example, if you have a mix of residential and commercial properties in multiple different cities, no single local market event is going to have a catastrophic impact on your overall real estate portfolio.
Diversify Your Broader Portfolio
You also need to think about how to diversify your broader portfolio. Real estate is a very attractive investment, but it’s not the only major investment worth considering. You can balance the risks of real estate investing with holdings in stocks and bonds.
Plan for the Long Term
When in doubt, plan for the long term. Don’t just estimate or act on risks in your immediate future; try to anticipate and guard against longer-term risks.
It’s important to recognize that risks aren’t exclusive to the world of property investing. Nearly every conceivable investment carries at least some risk. What’s important is that you understand what these risks are and that you account for them as part of your investing strategy. With proper mitigation and accounting, you should have no trouble making your rental property management strategy profitable, in spite of the potential risks.
