How To Mitigate The Risks On Your Rental Property?
Property investments are highly capital-intensive and an investor would want to make sure they remain a risk-free bet. This investor would do everything in his capacity to make sure that there are no loopholes. Under no circumstances would he want to leave any scope for an error. So, after a lot of research, this fine gentleman would buy a property only at a prime location. As a reward of his prudent choice, this investor would now expect a constant handsome rental income by letting the property out. But, does it mean all is going to be great afterwards? The answer is it may not.
There might be chances of this landlord not finding a tenant for a long time. The fact that the property is in a prime locality is no guarantee that one is going to find a tenant as soon as one opens ones doors. This will result into a loss on income for the landlord.
Suppose, things worked all right and you did immediately find a tenant. There are always risks of this tenant failing to pay you the rent, owing to unforeseen circumstances. What if the tenant lost his job? What if there are pressing financial issues forcing him to stop paying the monthly rent? In such a situation, you would in for a double whammy if you are using the rent money to pay off the bank mortgage for this property.
Worst of all, risks of willful damage of the property by tenants also loom. A tenant can be the cause of substantial depreciation of the property value. If that happens, you may end up spending more than you earned as rent to fix things.
In short, there is no way to make your property investment completely risk-free, which is true of all investment classes. The key lies in mitigating the risk. While a large part of the risk analysis is done at early stages, a landlord must be ready to deal with dangers that might arise in future. And, consider half the job done if you find the “right” tenant.
By right we do not mean just someone who would pay the rent on time and accept the annual hike in the amount.
By right we mean:
- Someone with a sound financial and social background. You have to make sure the would-be tenant does not have a criminal record. He should also not be under any financial obligations that might become a problem for you.
- Someone who would not make the neighbour live difficult, in effect becoming a headache for you.
- Someone who would take care of the property as his own during his stay.
For that, you will have to go for a detailed background check of this tenant. It always is time-taking to get the “right” person, and we do understand that it might take time, resulting in loss of income. A wise landlord would, however, be patient at such times and will not start entertaining unworthy tenants to earn “at least something”.
An effective strategy to cut down this wait time for the right tenant could be to hire someone, who knows the market better than you and have better contacts. Yes, we are talking about property advisors. An obvious question at this juncture would be: why would you pay this property dealer when you have a great property which would find many takers? Even the best of the things need a bit of branding and communication to find takers and earn their true values. The same is true of your property, too. When you compare the benefits of hiring a property dealer with the losses, the former will often overweigh the latter.