13 Risks in Real Estate Investing

13 Risks of owning rental property in no particular order:

Even with taking all the precautions and doing all your due diligence, even an awesome tenant today can turn into a nightmare tenant later hurting your pocketbook and sanity:

Your tenants aren’t making their rent payments at all
1. Covid has shown us the real risks involved in long term none payments
Tenants aren’t making their full payments
1. This can be just as painful coming out of pocket if you have debts to pay on your property
Cost to upkeep and rehabilitate the property
1. Over time you will have to fork out some cash to make repairs or replace wear and tear items and appliances
2. Wind and nature can gradually eat away at your place and these are also factors and will need to be kept as a maintenance item on going
3. Property taxes are always going up, always need to factor in those costs from year to year and there is no guarantee that the taxes and insurance rates will not increase (happens a lot after natural disasters) faster than you can increase your rents
Vacancy after Tenant Leaves after Lease Ends, Tenant Abandoned the Unit or is Evicted
1. You never know for sure how long it will take after a tenant vacates the property and you have it fixed up and get it ready to go for the next tenant, so you could lose a month or many months of rental income waiting to bring on your next tenant
  1. During that time you have lost rental income and can’t pay that mortgage you have on the house during that time potentially
  2. There is a pretty hefty fee from the Properties Manager or the Agent you hire to rent the place back out for you and that fee comes out to about 1-month rent as an additional expense
Lack of Liquidity
1. What this means is that if you need the cash, you have to wait until the property sells before you have access to the cash, assuming a HELOC or a Cash-Out Refinance isn’t an option, also if you happen to need cash at a bad time, think 2008, then you may be really hurting if you sell at a time like that
Being a Landlord isn’t a job for everyone
1. I believe it’s great and important to develop a great relationship with your tenants for many reasons but it can also make it hard when you have to raise their rents because of the expenses mentioned previously, having to enforce a contract can be tough
Not all properties make sense to rent out, they are not good rental property investments
1. Check the numbers on your rental property or properties, the number I heard was about 80% of properties are considered bad to convert to rental income property which we learned about when talking about negative cash flow properties
2. If the whole point of owning rental property is to make passive income, then it seems obvious that if it’s not making you money every month after all expenses are paid, then the property is a bad investment
What if’s in owning rental property
1. The bigger the repairs or the bigger the issues can also hurt you both mentally and financially
2. What if your property manager quits or the quality of their work goes downhill, you may be stuck managing an out of state property and that’s not going to end well if you don’t find another awesome property manager fast
3. Tax Codes can change both positive and negatively, it is rumored the current new administration will be doing away with the 1031 Exchange
4. You may have to be ready for anywhere between $300 to $30,000 in unexpected repairs if you have to quickly flip a single unit to re-rent and can include having to pull new permits and adhering to the new guidelines for your city like on a recent project we had to add special vents on a water heater and replace all plugs in the kitchen with breaker plugs, on another project we had to put in a water suppression system to meet new building codes
5. Insurance claims, yes there are times you can score and get lucky that an issue is covered by insurance, but that’s not always the case and you can’t count on that at all really unless your damage is specifically covered by the insurer so you have to plan accordingly
6. Decreased rents, yes, this can happen!
  1. Just like when the housing markets depreciate so can the rental market, if an area becomes depressed and finding renters becomes harder, if the market your home is in becomes depressed and everyone around you is lowering their rent, guess what, the market speaks and the rules of supply and demand also apply to the real estate rental market
  2. Also what I have seen happen is property is acquired with a long term renter in place and it just so happened that the renter loved the place so much the landlord who sold you the place managed to get them in at a higher than the market rate, then you will have to adjust your rate to accommodate again, at the lower market rate
Decreased property value
1. Typically I don’t care about the depreciation of a home because as long as it’s bringing in rental income and making my numbers work, it shouldn’t bother anyone who’s long in their passive income property investment. Typically the only time this will matter is when you are buying, selling, or refinancing. The other time this is really a factor is if it affects the previous pain point, the decreased rents and then because the numbers do not work you may feel forced later to sell and so that was another factor I wanted to bring to light here. But short of that scenario, I don’t care what the current value of my passive income rental properties are worth at any given time.
Utility Costs
1. If you have septic tanks, or if you aren’t rolling the costs of the utilities to the renter or they don’t pay all of them, then the payments fall on you to make as the owner, and keep in mind, these utilities may also need to be incurred while the home is vacant because you can’t have work happening at the property or show the place to potential renters without water, electricity, and the gas utilities still running a meter on you. Not to mention, unless you have owned a home before, you will have utility costs go up and it’s another factor to deal with. Water, sewer, garbage are usually bills that come from your city on top of the other stuff. The seller when you buy will always exaggerate lower what the cost of your utilities will be to make the deal look better for when it’s time for them to sell and you to buy, check receipts and statements. Ignore the Profit and Loss statements because they are frankly crap. Oh, some properties may also have HOA fees to worry about as well like a property we own in St. Louis is a normal single-family home and we were surprised to find an HOA, not of much but an HOA imposed by the city for that area to keep up the lawns.
Maintenance
1. Time goes by and things need to get fixed or replaced, that’s just a part of homeownership
2. People also can damage both accidentally and on purpose your place and those also will have to be addressed quickly and with capital or the issues can grow into bigger ones
3. These may not seem important but will need to addressed with time, money, and people to do things like repainting, gutter cleaning, water heaters or roof repairs or replace because water leaks are expensive from damage or mold, lawns, trees, overgrown brush, the city may send you letters to clean up your home because it’s ruining the curb appeal of the neighborhood, all these things will be on the landlord to address and solve (although it’s true a good property manager should be able to assist with these as well), and it goes on and on, the things that would need to be addressed at some point or another
People, not just the Tenants which we talked about already in-depth but also
1. Vendors
2. Neighbors
3. City Officials
4. Insurance
5. Lawyers
6. Inspectors
  1. All of these people will be putting eyeballs; if not also their feet inside of your property at one point or another, all introduce a level of risk to your investment and income potential. You try to build and control as much as you can, but people have always been unpredictable and a factor to take into consideration. If people are there for a fire, or there to complain, or there to say the paint is peeling or just ugly or the shingles are flying and causing damage to others’ property, these can also be potential downsides if you aren’t able to handle the situations properly. You can’t look at people as problems; just treat them with respect and dignity and hear them out; you can often easily solve most problems. If you can’t be a people person, maybe investing in real estate isn’t for you.
Being Over Leveraged
1. Don’t make a mistake and over-leverage yourself, make sure you have money in your reserves for a rainy day because one day, it will rain, don’t take people’s word for anything, do your own research, like with any investment, a wise investor has exit strategies for when things go wrong, and in general make sure you fully understand what you are getting into before you get into it. When you are about to jump out of a plane, you make sure your straps are good and tight, right? Take just as much care into your investments before you take that leap as well.

Bad Tenant Stories:

The owner has the property listed with a Property Manager or PM. Two years ago, the PM placed tenants….an elderly couple on a fixed income, into the property. They moved in with a dog and paid a pet fee. A few weeks after they moved in the wife got sick and her daughter came to stay for what was only supposed to be a ‘couple weeks’ to help. The daughter never left. The daughter brought a cat with her. The daughter talked the parents into telling the PM they got rid of the dog to avoid the pet fee when in fact they hadn’t. They were keeping the pets locked in a bedroom and not letting them out for fear of someone seeing them and notifying the PM. The parents ended up in a nursing home, and the daughter refused to leave my property. She was never on the lease or was given permission in any way to stay there. She was NOT paying rent. Yet the owner had to evict her legally. Yes, someone can sneak into your property, establish residence, and then you have to fight to get them out. To cut the story short, the owner now has a vacant property with the carpet ruined throughout. The hardwood underneath is ruined in several spots from pet damage. The health department is now involved because the house is infested with fleas, bedbugs, and spiders. Bad tenants are out there! Then factor that into your financials when you analyze a property!

Another Story, the Owner had been a landlord before and had good tenants and bad tenants. Unfortunately, the bad tenants outweighed the good ones. They had one tenant that was a nightmare and I kicked them out and then found out they took the stove and refrigerator with them. The owner then had to get the police involved and fortunately got the appliances back. What made this even harder was that I was in another state. They also trashed the place when they moved so it was expensive to get it ready for the next tenants. With that experience, I would only rent a place where I live close enough to inspect the place regularly and to personally pick the tenants after a thorough background check. Unfortunately, if you live in California, this isn’t a wise idea for many reasons that I would share in a separate video in the future.

There are tons of stories like these, and you only need to go online to find them, I just want to make sure that I always share both sides of each investment vehicle, the pros and cons so you can make an informed decision for yourself.

Finally, I would always recommend checking out a local REIA short for Real Estate Investment Associations and you can find them using something like MeetUp.com or visit REIA.org or even check out reiclub.com and find the groups with the most members with a focus on what you invest in and learn about their pain points as well as successes, contractors they love or need to stay away from, city pitfalls to avoid and so much more that you may not have even thought to worry about because it’s unique to that environment and city or county or state if your not investing in your own state.

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