The Potential Risks of Rental Real Estate
Becoming a landlord can mean a lucrative opportunity for long term passive income, but there are risks involved. Read on to learn some of what you need to know before making this type of investment.
Liability – What happens if a tenant trips and falls over a loose bit of decking on your property? Frivolous lawsuits are a real risk as a landlord, and this type of liability can be a scary thing. Providing someone with shelter in return for money puts you and the tenant in a relationship where both parties bear responsibility. It is up to you to ensure that the property you are renting out meets all government codes.
Unexpected Expenses – What do you do if termites move in? The water heater goes on the fritz? A pipe bursts? It is impossible to prepare for every expense related to owning rental property, so there are bound to be some unexpected ones. Things such as boilers, plumbing and fixtures often need to be replaced and are not prohibitively expensive. However, faulty wiring, bad foundations, compromised roofing and the like can be very expensive to repair. If you can’t find a way to pay for repairs, you will be left without a tenant and with the grim prospect of selling the property at a significant discount.
Bad Tenants – No one wants to have to use a collection agency to collect overdue rent. Unfortunately, almost every landlord has a story that involves police cars escorting his or her tenant out of the property – erasing all hopes of getting the five months’ worth of overdue rent. Bad tenants can also increase your unexpected expenses and even hit you with a lawsuit.
Vacancy – No money coming in means that you have to make the payments out of your own pocket. If you have an emergency fund for the rental property, you will be able to survive long vacancies with little trouble. If you don’t have one, you may find yourself scrambling to pay the rent to the harshest landlord of all – the bank.
Does this reality check find you running in the opposite direction of the life of a landlord? Before you write off this investment potential, stay tuned for Part III of this series: Tips for Minimizing your Rental Property Risk and Maximizing your Potential Income.