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Tuesday, January 29, 2013

3 Risks Involved with Purchasing a Rental Property


Becoming a landlord is looking more and more attractive with rental property functioning as a long-term, stable source of income. Nearly 4 million families have become renters in the past year, with rent prices rising rapidly.

However, there are several obstacles that explain why not everyone rushes to fix up and rent out properties in distressed markets. Here are some important risks to consider before starting a portfolio of rental property:

  1. Rental property requires initial investment and doesn’t guarantee a quick return

    • In addition to a down payment, monthly payment, mortgage interest and other purchase fees, considerable time and energy may be required to get your investment off the ground
    • Consider the total purchase price, maintenance costs, management fees, HOA fees, property taxes, as well as the monthly rental cash-flow, and always Calculate the ROI (Return on Investment) before signing any checks
    • Your rental property could quickly turn into a negative cash-flow “money pit” if payments and expenses exceed the monthly rent

  1. Maintenance may be required before the property is considered “rent ready”

    • Depending on the property age and location, your new single or multifamily home may not be in turnkey condition at the time of purchase
    • In distressed markets, such as Detroit, Cleveland & Chicago, where the unemployment rates are high and the incomes are lower, vacant properties may be stripped of appliances, copper pipes and plumbing.
    • Unless a property is completely turnkey at the time of purchase, necessary maintenance may range from light cleaning and dusting to heavy rehab
    • Even after you have secured tenants, regular maintenance must also be factored into the monthly overhead costs

  1. Employing a reliable property management company is essential to ROI

    • Will you have time for advertising and showing the property, screening tenants, collecting monthly rent payments, making simple repairs and, in general, keeping an eye on your investment?
    • Especially if you are purchasing a rental home out-of-state, employing a reliable property manager will give you peace of mind and reduce stress
    • Property managers offer a wide array of services and typically only charge 10-15% of the monthly rent

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