Financial Risks of Owning Rental Property

Financial Risks of Owning Rental Property

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Like any investment, rental property ownership has inherent risks besides potential benefits. While risk of economic loss is an inescapable factor, the key to sustain overall profitability is maximized gain by equally intensified cost-cutting efforts. Below is a summarized guide to strike an ideal balance for a winning landlord game.

Location

As the two main objectives are long-term value increase and short-term cash flow, these same goals must retain first priority for defensive loss prevention strategies. Erosion of either asset necessarily deflates the other interdependent variable. Thus, the first three criteria to evaluate are location, location and location. Land plat locations are fixed but surrounding vicinities drastically evolve with time. This makes future population growth trends a prime financial vulnerability for realty investors.

Building Problems

Another closely related issue is unforeseen structural disintegration caused by an unstable building foundation or dilapidated roofing or internal weight-bearing wall elements. Still a third common scenario is when raw land tracts lack basic improvements vital to intended developmental usage. For instance, one novice land speculator paid a large sum for many square acres he planned to develop into a big residential subdivision. However, he didn’t realize there were no sewer or utility lines on the plot until after the sale was finalized, thereby precluding any profit by construction cost in multiples of initial purchase price for a totally lost investment.

Renters Not Paying

When renters aren’t paying their rent on time, or at all, it can cause serious financial strain on the property owner. To prevent this type of problem from happening, it’s important to have a good contract in place. If not, it can be difficult to get that money. It’s also important to seek the help of an attorney that represents creditors in Brookfield, WI. To avoid problems with future tenants, be sure to run a full background check that includes getting information from previous landlords. Knowing their financial history can help you avoid bad renters.

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Occupant Turnover Rate

If you have renters constantly leaving and coming, it can cause financial strain. From months of unoccupied space to cleaning and repair fees, a high turnover rate can hurt your financial situation. It’s important to get to the root of the problem and understand why tenants aren’t sticking around. If it’s a simple fix, like cleaning up the property or getting new appliances, it’s important to take action right away. You should also consider anonymous surveys to get a feel for what tenants believe might be lacking.

Owning rental property has its risks and benefits, but it can be a smart financial endeavor with the right preparation. Understanding the financial issues that may arise can help you better prepare for success.

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