Real estate is one of those fields with high risk and high reward. After all, you are pouring large amounts of money, time, and effort into a project that may or may not pay off. Here are some of the most common risks – be familiar with them in order to dodge the worst-case scenario.
There are options for bad investments everywhere. Do your research. Gain as much experience as you can without buying, especially for the first time. If a deal seems too good to be true, that’s probably because it is. There are many reasons people would be desperate to sell a property, and none of them are good – especially if that previous owner was also a landlord. That means that they could find tenants. Maybe the property itself was undesirable, maybe it was the neighborhood, or even just the economic circumstances… but regardless, finding tenants won’t be any easier for you. Avoid severely damaged units unless you are confident in your ability to flip a property and you have calculated the profit it will bring.
Legislation can be nasty. And what’s even nastier is – even though there are many legitimate reasons to sue – there are groups of people who go around looking for vulnerable businesses and individuals to sue dishonestly and get a hefty settlement. You want to avoid that at all costs. A badly timed accident (no matter how small) could mean serious financial danger for you. You may want to look into forming an LLC for your business. If your properties are owned by an LLC, your personal residence will be protected from a lawsuit. It creates a legal boundary between your business assets and your personal assets. Typically, an LLC offers the best asset protection of any legal business entity.
If you’re in a situation where it’s hard to find renters, you might be tempted to lower the standards in your search. Be careful with this. Bad tenants might mean people who are looking for reasons to sue and make a quick buck. It might mean tenants who are always behind on the rent. It might mean tenants who trash your property. They might just even be toxic people who are hard to deal with! Whatever the case, you don’t want to get caught up with somebody difficult.
Nothing in real estate is guaranteed. An emergency (say, a global pandemic) might come along and change everything in the course of a week. But that doesn’t mean you can’t try and be prepared. If you know the dangers, and you know the market, you can avoid the worst of it.
Check out this article on tools every new landlord needs to use!