Real estate investors have every interest in making a profit – but not everyone is ready to face the difficulties of managing tenants along the way. Without the proper protection and approach, being owner can become a nightmare.
The prospect of moving from the homeowner to the real estate investor is both exciting and terrifying. You're excited about building a portfolio, securing your family's financial future, or financing your retirement, but you're also afraid of letting go of the well-known risks of real estate investments.
As with all investments, becoming a homeowner can have pitfalls, but you can implement simple strategies to avoid them.
Being a homeowner can be very stressful because it is not enough to sit down and collect the rent of anyone who walks through the door. You must also find the right tenant, sue him to make sure he pays every month and deal with maintenance, repairs and claims.
You can hire a property manager to supervise your rentals, but this is not a foolproof solution. As a homeowner, it is essential that you know the big risks in advance so you can protect yourself from the inevitable headaches before they happen.
Common Risks to Homeowners
1. Poor tenants
One of the worst things that can happen to an owner is to let an irresponsible tenant pass as a result of inadequate filtering. Bad tenants can cause you a number of problems, including property damage (deliberate or accidental), non-payment of rent and complaints from neighbors or authorities. Some tenants can even turn into annoying squatters, enjoying the comfort of your home without compensation.
2. Broken Rules
Irresponsible tenants are generally not interested in the rules you have defined – they will sneak into pets or guests, even if you said no, and let you clean up the mess. In some cases, long-term tenants can turn your place into a short-term rental via Airbnb or Stayz without your permission, so you can leverage your investment illegally.
3. Payment Problems
This is one of the most serious potential risks for a homeowner: not getting paid or being paid late. Some tenants only pay money when they are sued for rent and, in some cases, they can flee in the middle of the night without leaving a trace. Do not forget that these cases are the exception and not the rule. most tenants pay their rent regularly and without solicitation. However, you should consider your plan if the income from your property stagnates for an extended period.
4. Lack of maintenance
You tend to take care of what's up to you, but it's hard to believe tenants will do the same. Thus, a property that you rent in excellent condition can become catastrophic in a few years if you do not worry about the registration. When maintenance is not done regularly, it does not just mean that furniture, appliances and plumbing will be in poor condition – you could also be faced with major structural or electrical damage caused by parasites such as termites or rats.
5. Lazy Property Managers
Property managers are supposed to make your job easier, but a poor property manager can only create additional complications. If their answer is slow or hard to reach, you may not know what is going on in your property and your tenants may be out of touch. Poor managers are also inefficient or unmotivated when it comes to marketing your property to potential tenants, increasing your risk of vacancy and bad tenant placement.
The top five claims for compensation from owners
1. Loss of rental income
According to Carolyn Parrella of Terri Scheer Insurance, the loss of rent accounts for more than half of homeowner insurance claims.
2. Malicious and Accidental Damage
Claims can range from minor repairs to major cleanings of damage to a property.
3. Damage to water
This involves damage to property caused by leaking appliances or faulty plumbing. Note that not all premiums cover the damage caused by water to tenants.
4. Damage caused by the storm
Storms are a major cause of property damage, especially in places like Queensland, which is subject to weather disasters.
5. Death of the tenant
This is a surprisingly common reason why many homeowners are losing their rent.
Avoid These Risks
The homeowner issues mentioned above may be difficult to manage, but they can be avoided by setting clear standards and taking precautionary measures at an early stage:
1. Implement a strict filtering process
Do not be afraid to be very thorough when checking the background of potential tenants. Even if they do not really hit your door, do not let despair affect your judgment – in the end, you have more problems renting to a bad tenant than waiting for a good tenant. To avoid late payments or non-payment of rent, it is important to specify in the rental contract the time period in which you expect to be paid and the consequences in case of missing payment. Treat the real estate rental as if it were a business.
2. Hiring a good property manager
Find someone who has a solid background in the effective management of properties in the locality. Check their credentials and get in touch with their other customers. You can not expect to get quality service at a low price, so do not try to spend a lot on this expense. "Cheap is not expensive for a reason. In most cases, if you pay for peanuts, you get monkeys. Use a professional to act on your behalf, "said Drew Evans, Head of Strategy at Caifu Property.
3. Know How the Law Protects You
Laws differ from state to state, but homeowners are entitled to certain legal rights in the event of a dispute with a tenant or property administrator. These regulations are listed on the websites of most state governments, and getting acquainted will put you in a more advantageous position in case you need to enforce the terms of the lease or terminate the contracts. However, it is not always because you can sue that you should do it. "In the end, it comes down to being fair and reasonable. If the cost of a lawsuit outweighs the potential loss, then you have to weigh if it's really worth it, "advises Evans.
4. Make regular spot checks
It is often said that if you want something to be done well, do it yourself. So, if you want to make sure everything is all right on your property, you need to take time out of your schedule to stop, preferably unexpected. In this way, your real estate administrator knows you are on the ball and tenants are less likely to be deported if they know you can come at any time.
5. Obtaining insurance
Your property may suffer damage that you can not avoid, even if special care is taken. You must be protected against such costs. "[A comprehensive landlord insurance policy] includes claims for several insurable events," says Carolyn Parrella, Executive Director at Terri Scheer Insurance. In fact, homeowners' insurance does not only protect you in the event of property damage, it also reduces the financial consequences of the fact that the tenant leaves the city and stops paying his rent.
Owning an investment property and renting it can be a risky but rewarding prospect. As long as you do not come to the rental market with your eyes closed and you expect the investment in the property to be a "fictional" prospect, being a homeowner can give you the means to live in complete freedom.
