Investment properties are properties in which the owner plans to make a return on investment through either rental, resale, or both. With the right planning and management, they can be a nice little earner. But sometimes, they can be a slippery slope into financial distress. If you’re planning to invest in real estate, here are 6 hard truths about what could potentially await you.
Initial Costs Can Be Very Steep
Buying property is a costly affair in general, let alone when you’re venturing down the investment avenue. Financing the purchase of your investment property could well be your first hurdle, especially if you already have a mortgage. One way you can do this is through a cash-out refinance, however you will need to have sufficient equity in your home, as well as pass your lender’s assessments. Investment property mortgages are another option, but they can be very costly, and you can expect down payments of at least 25%, as well as stricter credit score requirements and higher interest rates.
Upkeep Can also Be Very Costly
Once you bought an investment property, there’s a very good chance you will need to perform some maintenance on it. Depending on the building’s age and condition, this can be anything from a fresh coat of paint, to plumbing repairs or installing new flooring.
Upkeep, however, is something you will need to keep on top of for as long as the property is in your possession. Rental properties in particular can be very high maintenance, and could require costly upkeep, depending on the tenants who have lived there previously.
At the same time, it’s important to check on and maintain properties that you intend to sell, especially if nobody lives there. For example, a vacant property that’s been on the market for several months can suffer unexpected damage, such as a pipe freezing in winter, and causing water damage when it bursts. Not only will you have to contend with the financial losses that come with a property that isn’t selling, but now you also have an expensive repair on your hands.
Finding the Right Tenant Can Be Tricky
If you’re buying an investment property that you intend to rent out, it’s important that you find the right tenants to live there. Ideally, you should draw up a contract that clearly stipulates rules such as no smoking or no pets, as well as ask for a security deposit. Yet even so, you should prepare for cases in which rent is paid late, tenants are disruptive, your property is damaged (whether on purpose or accidentally), items get stolen, or tenants simply abandon the property without any notice.
In the best case scenario, the security deposit will cover any damages and items that need replacing. But even so, you run the risk of taking your property off the market for a few weeks, while repairs are being performed, which can set you back financially.
It’s worth noting that evicting a troublesome tenant takes time, and needs to be done in accordance with the law and the local renter’s rights. Also, as a landlord, you will need to wait a standard 30 days before you can use the security deposit, assuming that your tenant doesn’t qualify for a return.
The Property Value Could Decrease
Depending on market fluctuations, the value of your property can either rise or fall. This can put a spanner in the works if you’re buying investment properties with the intention of selling them later on. The most common scenario is neighborhood decline, which will result in a depreciation of your property’s value. Regardless of whether you’re dealing in commercial or residential investment properties, pay close attention to the signs of a declining neighborhood prior to buying, such as an increased lack of stores or public transport.
Selling an Investment Property Can Take Time
Unlike other types of investments, properties are not a liquid asset. If you’re flipping properties or just planning a resale later on, prepare for any financial drawbacks that could arise while the property is on the market. And as any investor knows, the older the listing is, the bigger the risk of not closing on a sale.
Lots of Hidden Costs to Watch Out For
On top of the initial cost, upkeep and maintenance, investment properties pack hidden expenses that might not be obvious at first sight. The best example is long periods of vacancy for rental properties, especially when there’s little demand. Not only that, but if you’re a landlord dealing with several rentals, you will find yourself in need of hiring a property manager, which adds to your monthly costs. Don’t forget to take property insurance into account, and also keep an eye out for an increase in local taxes.