5 Risks of Owning Rental Property That Every Landlord Should Know
What are the risks of owning rental property? Buying a property for rental in Singapore is an effective way to generate income before or during retirement. Whether it’s the financial opportunity that drew you in, or simply the pride of ownership, becoming a homeowner or landlord can be a rewarding and financially successful venture.
However, despite rental properties being one of the least risky options for investing in real estate, there are a few risks that are associated with owning a rental property that every landlord should know about if they want to find success in their investment.
Risk #1: Bad Location
Whether you’re buying a rental property or any other type of real estate property, you should always take the location of the property into consideration. Location is everything. Do your research ahead of time so you know the best markets to invest in for rental properties. Look for factors that are important to tenants, such as safety, parking, and walkability, and check the rent prices of similar properties in the same neighbourhood.
Some locations might seem like a great choice for a rental property due to lower prices and higher occupancy rates. But, in many cases, these numbers might indicate that the area is either underdeveloped or that it has a relatively higher crime rate. Purchasing a rental property in a neighbourhood that has a higher crime rate might seem like a good idea if you’re only looking at the price of the property, as it will most probably be lower than the average price in the housing market. These areas also have a higher occupancy rate as people tend to rent homes instead of buying them.
However, the risk lies on your rental property getting vandalized or robbed, which might lead to unexpected expenses and repair costs, besides the complications of legal matters that might arise due to these acts.
In most cases, the risks are not worth it even it might be a good idea to invest in cheaper property in bad area, although the location is showing signs of future development and improved presence of the law.
Risk #2: Bad Tenant
While a landlord would typically want their investment property to be occupied whenever the opportunity arises, the slight increase in the occupancy rate might not be worth the while in some cases. Before renting out their property, a landlord should make sure that the tenants who are going to stay will not cause any additional headaches, or even cause financial losses to the landlord.
It is crucial to screen the prospective tenants who are applying to rent the property before considering handing them the key. Getting a tenant who cannot pay reliably is one of the biggest risks of owning rental property. Tenants who are chronic late payers can be a constant source of stress. Tracking down rent payments takes time, effort and may cause your mortgage payments to be late. So how are we dealing with bad tenant? Contact us to know more.
You may also have a tenant who damages the property, requiring you to shell out good money to fix the place up again. Additionally, you should contact any previous landlords who have dealt with the tenants to ask them for reviews.
Risk #3: Negative Cash Flow
A positive cash flow means that you’re actually earning money on your investment, while a negative cash flow means that your expenses and mortgage payments are higher than your rental income, hence you losing money on your investment over time.
To achieve a positive cash flow, it is crucial to have accurate calculations of your rental property’s expenses and costs before moving forward with purchasing it. This includes estimating all the different expected and unexpected costs related to your investment, such as maintenance and repair costs, vacancy rate, and property management.
The mortgage is likely your largest obligation, but there are taxes and other cost considerations to keep in mind. Not calculating cash flows correctly before making a purchase could mean that you’re struggling to make a profit or break even each month. If the numbers don’t work on paper, don’t purchase the property.
Risk #4: Economic Downturn
An economic downturn is a risk that can be difficult to predict. As a landlord, you should always keep yourself up to date on the market economy, and you also need to educate yourself to understand the market and how it functions based on the different factors that matter.
If you buy a rental property during peak times at property prices, even if this property giving you profits through its rental income, when the time comes for selling the property, you might find that its value has gone down drastically as the market goes down from its peak price time, resulting in you selling the property for a lower value. This might even cost you more money than you’ve earned during the period of renting the property out.
Even if you have a good reliable tenant, an economic downturn could mean they lose their job and are unable to make their rent payments. This may leave you with the difficult decision of having to evict your tenant.
Additionally, if you can’t find tenants who can pay the rent during a downturn you may be stuck lowering the rent payments – which could bring your income level below the expense level of the property and leave you with a negative cash flow.
Risk #5: Vacancy Rate and Period
The biggest and most common risk that landlords usually take into consideration when investing in a rental property is the risk of high vacancy rates. Since your tenants are the source of income from your rental property, it needs to be occupied by tenants for a good portion of the year, so that you can earn money from your investment.
An extended period of property vacancy is a serious risk for any landlord, and it could happen often and quickly if you aren’t careful. It can be one of the costliest issues that come up with a rental property, with expenses that include lost rental income (often forcing the landlord to look for other ways to cover the mortgage payment), turnover-induced repairs, advertising costs, utilities, etc. The longer a property is vacant, the more the costs add up.
Properties may have an extended vacancy due to a difficult economic environment, setting the rent price too high, being in an undesirable area, poor property condition, and poor advertising, among other reasons.
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