Top 5 Risks Real Estate Investors Encounter and How to Remove Them
Like many real estate investors, in the past I bought many properties by analyzing the property, the potential rents and expenses, and then evaluating the property's financial merits. Having had a great deal of success with this, I had many friends and clients wanting me to assist them. The task, of course, was to do proper diligence to mitigate the risk of unforeseen expense and create a performance report for the property. This is a task I took very seriously, as any good investor would, since the true outcome would make or break the investment.
The 5 top risks associated with investment property
1. Finding property that will generate good cash flow today and equity growth for your exit strategy: This of course is the number one objective with most investors and certainly was my top priority. This required identifying sweet spot properties that were in an area that would generate high tenant demand and would rent for a rate that could generate cash flow.
Meanwhile, it also had to be in predominantly owner occupied areas that were representative of locations that would attract a retail buyer when it was time to execute your exit strategy of selling to the retail buyer. This micro market diligence is paramount to an investor’s success and required great knowledge of the locations as many areas have little to no buffer zones between high demand subdivision and low demand subdivisions.
2. What can you charge for rent:
When you buy property to use as a rental property investment, getting this rental rate properly established is paramount as it can make or break the investment. Assumptions need to be replaced with proper diligence to learn what past properties similarly priced have rented for. There is a great tool to aid in this venture. A tool called Rentometer can give you past rental rates and has been a great tool that I often use because improper diligence here can have dire consequences.
3. What will the true expenses will be:
Here is another piece of diligence that needs to be very accurate. There is very little room for error. Every dollar that you under estimate will come out of your cash flow. Many people they border on the side of safety and estimate these expenses high which of course makes sense. The tricky part is, it can be easy to over-calculate the expenses to the point you pass on a property that may indeed have been a great investment for you.
4. Is there sufficient rent demand to keep my property occupied:
To maintain sustainable returns, you need to keep the property rented and occupied. This perhaps is the piece of diligence that I see to be most overlooked. The best pro-forma is only as good when it is actually performing.
Investing in markets where the rental occupancy rate is at, or below, the national average is a great starting point. If the market you are wanting to invest in has a vacancy rate higher than average, you will want to reconsider or at least dig very deep to see how your chosen property is able to rise above those averages. This typically entails lower rents and why would a lower rental price be a top choice for you?
5. Where do I find great property management:
Any seasoned investor will tell you that property management will make or break the investment. Hiring a property manager is serious business, equally as important as buying the right property. I learned this very important aspect the hard way many years ago by hiring a lower priced property manager. It totally ruined my portfolio when vacancy rates for my properties shot up to 80%.
Over the years I have come up with some very tough questions when vetting my property managers and this is the questionnaire I use to vet my property managers now. When they answer these questions to my satisfaction, I know I have a great property management company.
Over the years I have found ways to easily overcome each of these risks, as overcoming risk is the only way to build an investment portfolio with a strong foundation. The proverbial, “I wished I would have known that back when I started investing”, resonates with many during a lot of these discoveries.
How to remove these 5 risks with one quick and simple action
The discovery of single family turnkey companies is my single most advantageous discovery. There are companies that specialize in buying property in the micro markets we know as "the sweet spots".
These companies tend to exist in the emerging markets where all the fundamentals are in alignment for sustained cash flow today, as well as great appreciation for the exit strategy. They have the ability to buy and renovate the property with economy of scale pricing and they manage the properties as if they were their own.
Their business model is to buy, renovate, place tenants and manage the properties and then sell these as performing assets fully rented to the investor as a "done for you" passive investment. Essentially, all the risks identified above are removed from the investor and placed on the turnkey company. The turnkey company of course can more easily mitigate these risks with their vast knowledge of the local marketplace and their economy of scale powers. You have to love when a true win-win comes together.
Your only role at this point is to validate the information they provide to you. You no longer have to guess and assume at all the variables as they have all been established, making for much safer and sustainable investments.
To learn more about the good turnkey companies that we have already vetted (as we do this every day and have become very good at it) give us a call or drop us an email. Happy investing!