Everyone should take the time to study the decisions, behaviors, and habits of wealthy individuals to understand which sweeping trends are common amongst them. Among other things, you’ll discover that they have an affinity for real estate investing. Thus, if you want to build your own wealth, it would make sense to at least consider this route.
Having said that, real estate investing is all about risk-reward. The rewards are pretty clear – you can see more on that here – but what about the risks? What are they? And how can you address them in manner that makes you successful in the long-term?
We’ll discuss all of that and more in this article.
7 Big Landlord Risks (And How You Can Neutralize Them)
This article isn’t meant to dissuade you from investing in rental properties – it’s simply meant to provide awareness on some of the risks that are out there. The good news is that they can all be prevented or mitigated through smart preparation and strategic decision-making.
Let’s dig in to see how you can neutralize the biggest possible issues you might face:
Legal action is perhaps the biggest threat against landlords. Generally speaking, there are five reasons why a tenant would sue you:
- Wrongful eviction. Taking the step to evict a tenant is a serious decision. Unfortunately, tenants often have more rights than they should and can sue you if you don’t follow the process correctly each step of the way.
- Livability issues. A tenant can sue a landlord if the residence is deemed to be uninhabitable. Conditions that may lead to a property being labeled uninhabitable include improper sewage disposal, lack of heat, lack of water, lack of electricity, severe rodent infestations, significant structural defects, etc.
- Breach of quiet enjoyment. Tenants have a right to “quiet enjoyment” of the premises that they’re leasing. If you improperly enter the property, let others into the residence without consent, or turn off utilities (like water or electricity), you could be found in breach of this right.
- Financial disputes. One of the most common financial disputes is over a failure to return a security deposit. Should the tenant feel they’re entitled to that money, they could sue you.
- Improper use of tenant’s credit. As a landlord, you’re required to abide by the Federal Fair Credit Reporting Act. If you misuse a tenant’s credit report and/or deny application for unwarranted reasons, you could be sued.
The good news is that you can avoid lawsuits by simply following the rules. But accidents and oversights do happen, which is why it’s recommended that you protect yourself with the right legal entities (LLCs) and insurance policies.
Buying the Wrong Properties
Not every piece of real estate is suitable for renting – at least not profitably. If you’re new to the real estate investing game, you could find yourself in a situation where you purchase a property at the wrong price and end up with negative cash flow. Things can unravel pretty quickly from here, creating money problems and possibly leading to a foreclosure.
Major Maintenance and Disrepair
Pipes burst, foundations crack, crawlspaces flood, HVAC units stop working, tornadoes hit – any number of issues can affect a rental property and lead to expensive maintenance and repair bills. And if you aren’t prepared, it can leave you in a troubling spot. There are three ways you can lower your risk:
- Invest in preventative maintenance
- Keep an emergency fund of three to six months of cash on hand
- Purchase adequate homeowners insurance coverage
If you do these three things, you’ll always have options. You won’t ever be in a situation where you could lose the property.
A month-long vacancy is to be expected on occasion. What you don’t want is a year-long vacancy where your property sits there and sucks the cash out of your pockets. You can avoid the risk of extended vacancy by taking care of your properties, pricing them appropriately, finding the right tenants, and treating these tenants well.
Tenants Who Don’t Pay
Tenants who don’t pay, or who consistently pay late, can hurt your cash flow and create accounting headaches. In serious situations, they can force you to miss your mortgage payment.
Prevent late-paying tenants by doing more thorough screening and by incentivizing tenants to pay early with discounts and other perks.
Illegal Activity on Property
Even though you’re not directly involved, any illegal activity that occurs on your property could implicate you. This is especially common with drug-dealing and other related issues.
“Anyone who is injured or annoyed by drug dealers—be it other tenants or people in the neighborhood—may sue the landlord on the grounds that the property is a public nuisance that seriously threatens public safety or morals,” Nolo explains. “Local, state, or federal authorities may levy stiff fines against the landlord for allowing illegal activity to continue.”
The good news is that you can prevent most illegal activity through proper screening and tenant vetting. However, should a bad tenant slip through the cracks, you should remain vigilant and conduct semi-regular check-ins. If you notice any issues, contact law enforcement and brief them on the situation.
On a big picture scale, there’s the always the risk that you could get caught up in the middle of an economic crash and/or real estate market collapse. If you’re overleveraged, this could create financial problems that lead to unwanted consequences like foreclosure and/or bankruptcy. You can lower your risk by not overextending yourself on financing and only biting off what you know you can chew.
Let Green Residential Help
Green Residential has been in the property management business for more than 30 years. Over that time, we’ve worked with thousands of Houston area landlords, renters, and homebuyers. And we’d love to work with you, too!
When you partner with Green Residential, you gain access to our comprehensive array of property management services – all at an affordable flat rate management fee. This includes rent collection, maintenance and repair coordination, monthly accounting statements, property marketing, tenant screening, and more.
For additional information, please contact us today!