There’s a reason not everyone is cut out for owning rental property. With every potential strategy for wealth building or growth comes a certain amount of risk, and real estate is no different. However, you can minimize this risk by understanding some of the most immediate challenges you’ll face as a rental property owner and doing everything you can to avoid them.
Here are five challenges of owning rental property and some ways you can overcome them.
Financing and startup capital
Being able to finance the purchase of a rental property keeps many potential investors from even getting started. Ideally, you’d be able to put down at least 20% as a down payment and secure a traditional loan on your new property, with the idea that your tenant’s rent payment will cover it and any other bills (also known as cash flowing). But, not many have that kind of cash lying around for their own personal residence — much less their first rental property. Not to mention you’ll need a little extra cash to make the property rent-ready, no matter how turnkey it is.
The good news is that there are several ways to solve the problem of financing your first property. Once you start building equity, either through forced appreciation or long-term market gains, it becomes a little easier to purchase the next one.
One popular method is house hacking — purchasing a duplex and living on one side while renting out the other side. Not only may you be able to live rent-free (depending on how much your tenant pays and your mortgage payment), you may be able to qualify for an FHA loan with a down payment as low as 3.5%.
In addition, instead of needing to come up with a down payment for your own home and a rental home, you only need one since you’ve combined them. Just be aware that an FHA loan may require you to live in the home for at least a year and pay mortgage insurance for the life of the loan.
Mortgages are only one part of the financing you’ll deal with when buying and selling real estate.
Consider the closing costs, real estate commission, title insurance, escrow fees, attorney fees, transfer tax, home inspections, and repairs: You can raise capital to pay for these expenses, but at some point, you’ll need savings built up to finance your purchases.
It’s important to look for opportunities that make your deal more appealing to investors and mortgage companies. Discount real estate brokers that offer buyer rebates, seller concessions, and negotiating for better deals help important metrics like cash-on-cash return and monthly cash flow align with your long term goals.
You’re playing the long game
Owning buy-and-hold rental property certainly won’t make you rich quickly. Instead, you’re reinvesting a little each month, using tenants to help build your equity, and growing your business for the future. If your properties are cash-flowing (which they should be!), you may enjoy a little extra income each month, but you’ll need many properties to be able to completely replace your day job and rely solely on rental income.
Dealing with difficult people
It’s inevitable that you’ll deal with difficult people as a landlord of residential rental property. We’ve all heard the story of our co-worker’s cousin’s father-in-law who owned a rental property that was trashed by the tenants, resulting in thousands of dollars in loss. Along with financing, these horror stories are some of the major reasons those interested in real estate don’t jump in.
Not only will you deal with difficult tenants and various sob stories, but you may also deal with tricky contractors or bankers. However, there are ways to minimize these negative interactions — whether through more effective screen processes, doing more due diligence when hiring, or even outsourcing by hiring a property management company.
Real estate investors and property managers are not the same. While many investors are able to manage their own properties, these two professions involve very different skills. Investors are great at networking, finding great deals in the right areas, and securing financing — a good property manager is great at keeping track of daily income and expenses, knows how to market a vacant property, and can stay on top of the day-to-day needs of current tenants.
If you decide to manage your own properties — or can’t make them cash flow without doing so — you’ll want to make sure you’re prepared. This includes understanding and keeping up with local laws regarding rental properties, being available for any emergency calls from tenants, and keeping meticulous track of rent payments and bookkeeping for each property. Managing your own properties can be a ton of work — especially at the beginning — so be aware you’ll need to invest some time and maybe even money in the initial learning curve.
Laws, taxes, and other dirty words
We’ve already touched on this a bit, but as a rental property owner you’ll either need to be an expert in tax law, landlord-tenant laws, and real estate laws or have a close relationship with someone who does (and pay them accordingly).
You may not be surprised to learn that you can end up in a lawsuit with a tenant (or even an applicant for one of your properties) if you’re not aware of the laws and act within them.
Some of the most common lawsuits involving landlords involve discrimination. When conducting showings, reviewing applications, and ultimately choosing a tenant, it’s imperative that you know your local, state, and federal laws and follow them, or you could ultimately lose your investment.
While there are indeed challenges to owning a rental property, there are strategies you can use to reduce them or get rid of them altogether — as we’ve discussed here. By doing your research, anticipating what challenges you may have in advance, and employing the right team of professionals when needed, you can get started investing in real estate and continue to grow your business — and your wealth.