Some people think that if they invest in property, they can boost their cash flow income easily, with little work involved. However, buying properties and renting them out is not as simple as it seems.
Playing chess is also not as easy as it looks. You need to know how each piece moves and consider each move you make very carefully. In the same way, before purchasing a property for investment purposes, make sure you are familiar with the various risks and challenges that landlords experience. Then, decide if you still want to go ahead with the purchase, or if you prefer to look for alternative options to buying real estate without becoming a landlord.
Learn the business of property management
Before renting out a property, it’s important to familiarize yourself with the responsibilities you have towards your property and your tenants:
- Make sure you understand all the tax implications of owning a second property.
- Anticipate technical repairs to the apartment. You may need to learn how to do them yourself, or be ready to call a handyman whenever the need arises.
- It is your responsibility to make sure the property has proper building codes and answers all safety requirements. If someone is harmed on your property as a result of negligence, such as in a fire caused by faulty electric wiring, as landlord this may be your responsibility.
What are the risks involved in renting out real estate?
- Going into debt – Relying on monthly rental income to cover your debt expenses is risky because there may be times when you can’t find anyone to rent your property. Where you will find the money during the months that your property stands empty?
- Difficult tenants – Tenants who either don’t pay on time or leave without paying at all can cost you a lot of money in unclaimed rent as well as the legal fees and time involved in getting what you’re owed. Similarly, some tenants don’t care about the rental property they are living in, as it doesn’t belong to them, and you may find yourself with a huge repair bill once they leave.
How to avoid the risks of being a landlord
First of all, before buying an investment property, make sure you have enough cash to cover the entire purchase. This way, you are eliminating the risk of not being able to cover your mortgage when you aren’t receiving regular rental income.
Consider buying REITs
REITs (Real Estate Investment Trusts) are companies that own different income-producing properties. Similar to the idea behind stocks in a mutual fund, REITS allow you to buy a share of a property, but the company managing the property handles the real estate instead of you. The rental income you collect comes in the form of dividends, and many REITs pay fairly high dividends.
Another benefit of REITs is diversification – which you can’t have if you buy a single rental property. Depending on the type of REIT that you purchase, you can invest in residential units, office buildings, and other types of property.
Consider incorporating REITS into your overall diversified portfolio if you believe that investing in real estate is right for you. Remember, though, that no investment is guaranteed, and REITs also have their own risks above and beyond the risks you also have as someone buying stocks.
There are different kinds of REITS, including mortgage REITs, publicly-traded REITs, and non-traded REITs. Before investing, you need to look at each kind to see which one is best for you. Whichever kind you choose, pay attention to interest rates, as changes in these can affect the value of your investment. As a potentially high-yield investment, a REIT may be sensitive to interest changes. History has shown an inverse relationship between REIT prices and interest rates. Therefore, REIT prices go down if interest rates rise.
Before buying any investment (REITs, real estate or any other asset) determine your tolerance for risk as well as your goals. Use this free STRATegic goal building worksheet to define your goals and take a step closer to achieving them.
Douglas Goldstein, co-author of Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing, is an avid chess fan, international investment advisor and Certified Financial Planner.TM
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