Although it may seem like common sense, one of the tested ways to mitigate property management risk is to buy well below what you can afford. Buying properties that stretch you to your financial limits is far riskier because the margin for error is incredibly small. It also makes you susceptible to market conditions. By leaving yourself a safety cushion between what you buy and what you can afford, you can better protect your cash flow and your investing business.
One more great way to decrease your real estate investment risk is to do in-depth research on every potential property. As part of your decision-making process, it is a great idea to gather as much information as you can, including due diligence regarding every possible problem an investment property might have. Pay attention to the property’s condition, the composition and safety of the neighborhood, developments in the local area, the current state of the economy (both local and national), and more. While you don’t want to get caught up in research, it’s also true that the more you know, the lower your risk will be.
Along with research, one of the greatest ways to avoid real estate investment risk is to make and follow a detailed investment plan. All businesses need a good business plan to stay profitable, and the business of buying rental houses is no different. For rental property investors, a business plan is like a roadmap that you can then follow to long-term success. It is important to set specific financial goals and work closely with a financial advisor to outline a reasonable plan.
Furthermore, building expertise in particular markets or demographics can help you avoid potential investing pitfalls and streamline your investment property search. Investing in more than one market is an excellent way to diversify your portfolio, but it is also crucial to first know as much as you can about your target areas. Good prospects are towns or neighborhoods where residents have higher levels of expendable income.
Markets with high demand for single-family rental homes and an inadequate supply will not only help you find and retain tenants but reduce your investment risk as well. A market with an active consumer base will also help you sell fast when the time comes. Looking for these and other signs of a stable local market will help you lessen your investment risk and increase your bottom line at the same time.
Ultimately, it’s important to acknowledge that as a rental property investor, you are only as good as your investment team. Building a strong, location-specific team with real estate professionals, a financial advisor, tax and accounting experts, an attorney, a mortgage lender, and great property management professionals is a great way to set your investing business up for long-term success. While good cash flows are critical, having a system and a great team is the key to reducing your investment risk and making smart investment decisions. With Real Property Management Consultants by your side, our Pleasant Hill property managers will ensure you get the most out of your real estate investments. Call us at 816-207-0750 for more information.