Assessing budget, location, and more when investing in rentals
There is always some risk associated with buying a property for the sole purpose of renting it out, whether on a monthly or a daily basis. But regardless of rental timelines, here is a checklist to follow that will help reduce your real estate investment risks.
The first step in the process of buying a rental property is setting up a budget. Based on your savings, income, recurring expenses, and expectations for the next few years, you should determine how much you can put down and how much you can spend on a monthly mortgage payment. Once you set up a budget, you should narrow down your search for real estate listings only to those within your price range.
Many real estate investors, especially beginners, make the mistake of going over their budget because they get emotionally attached to a house. Exceeding your budget puts you at risk of a foreclosure. The safest way to avoid this risk is to focus exclusively on rental properties for sale that you can afford. Throughout the process of buying an investment property, remember that this is just a business, so you should act rationally rather than emotionally.
Invest in Simple, Inexpensive Properties
While luxury real estate can be a very profitable investment strategy, high-end properties are notorious for the problems they can cause to investors. Finding tenants for a mansion in Hollywood is significantly more challenging than securing renters for a condo in Boston. Not to mention how much fixing up even a small repair on a luxurious property can cause.
To reduce risk, experts recommend buying relatively small, basic, and affordable rental properties. First of all, vacancy rates are significantly lower for such properties as they are affordable not only for investors but also for tenants. Second, maintaining a simple, cheaper property will not push you into bankruptcy.
Diversify Your Investment Portfolio
Portfolio diversification is a proven way to reduce risk in any investment strategy, including real estate. By owning multiple investment properties, you diversify your rental income sources. In this way you immediately eliminate the risk of being left with zero rental income. Even if one or two of your properties remain vacant for a couple of months, your other properties will continue acting as a safety net.
Diversifying your real estate investment portfolio is not as simple as buying a few different properties. It is important to invest in several different markets, purchase varying property types (single–family homes, apartments, condos, townhouses, etc.), and go for both traditional (long– term) and Airbnb (short–term) rentals. This is the ultimate way to risk–proof your rental property business. In case one housing market takes a downward turn or a certain property type faces a slowdown in demand, your other properties will continue to bring you income.
Choose Locations Good for Both Strategies
Clearly the goal of any real estate investor is to make as much money as possible. According to nationwide analysis conducted by Mashvisor, a real estate data analytics company, Airbnb rentals are the most profitable rental strategy in the majority of U.S. markets. Although the recurring expenses of a short–term rental property exceed those of a long–term rental property, the rental income is also significantly higher.
However, in the world of investing, higher return usually comes with higher risk. Vacation rental investments are considerably riskier than traditional ones. In many major cities such as Los Angeles, New York, San Francisco, Boston, and Chicago, Airbnb has been deemed illegal as an investment strategy as non-owner–occupied short–term rentals are no longer allowed by local authorities. The current pandemic is showing that vacation rentals are also more sensitive to crisis as they have been hit significantly worse than traditional rental properties.
This doesn’t mean to say that investors should avoid this strategy as it usually brings a higher return. The best way to reduce risk in this regard is to choose a market where both strategies bring a good rate of return. In this way you can always switch between strategies if things take a negative turn for Airbnb.
Hire a Property Manager
Hiring a professional property management company will lower the risk associated with running a rental property. Property managers are professionals who know how to optimize the occupancy rate, enhance rental income, screen tenants, and deal with all their needs. You don’t have to reinvent the wheel by being a DIY landlord or Airbnb host. Allow a professional to take tasks off your plate so you can devote energy and time to other facets of your business.
Daniela Andreevska is Marketing Director at Mashvisor, a real estate analytics tool that helps real estate investors quickly find traditional and Airbnb investment properties. A research process that’s usually 3 months now can take 15 minutes.