Investing in single-family rental properties can be an inherently risky business. Since there are ample opportunities to make a very good profit, a lot of things could go wrong. The good news is that there are several good ways to reduce your risk and avoid ending up with a less-than-profitable rental property. If you know the top three ways of minimizing the risk in your real estate portfolio, then you can confidently keep your investments away from some of the dangers of rental property investing and reduce your risk.
Invest in Different Locations
One of the best ways to protect your real estate portfolio from downturns in any market is by expanding outside of a single area. With today’s new technology and platforms, you can easily invest in properties almost anywhere you want. And, when you include a trusted property management company like Real Property Management DC Metro on your team, you can profitably own rental homes anywhere from Logan Circle to properties that are hundreds or even thousands of miles away. In doing this, you can thin out your market-related risks while also exploring investment properties in some of the nation’s hottest markets.
Another great way to mitigate real estate investing risk is to “buy value.” Value investing means finding properties priced below market value. In the single-family rental home market, this could be as straightforward as searching for underpriced properties. However, there are also other ways to think about value. Purchasing a rental house with rental rates lower than the current market rate allows you to raise rents and protect your cash flows. You can also purchase a property that you can easily upgrade with inexpensive improvements or by providing add-on services. These features could improve the property’s value or tenant appeal (or both). Finally, keeping a close eye on future developments and buying in areas before housing prices start to climb could be another strategy to ensure that your investment will keep on offering you stable returns in future years.
Secure Favorable Financing
Speaking about financing, there are a lot of things you can do to mitigate or reduce risk. When you pay a higher down payment, you markedly reduce your interest rate as well as your monthly mortgage payment. If you have cash on hand, this is a good way to keep future costs low and protect your investment from real estate market fluctuations.
Finding lenders who offer favorable terms or creative financial options is also a good strategy. Exploring these creative financing solutions could give you lower interest rates and improve your cash flow. For example, if you plan to hold a property for less than ten years, you might benefit from an Adjustable Rate Mortgage (ARM). ARMs usually come with a lower initial interest rate, which means improved cash flow for you. Finally, when interest rates drop, you can consider if it is ideal to refinance higher-interest loans or not.
When you invest in diverse markets, with an eye toward value and explore other financing options, you can reduce many of the risks associated with investing in single-family rental properties.
And when you’ve secured a property or two or three, make sure you have a reliable property management team on your side. To learn more, please contact us online or call our Mission Valley office at 858-997-2100 or our Temecula office at 951-461-0100 for more information.
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