Any investment comes with some level of risk. If there were no risk attached to it, it wouldn’t be an investment. But smart investors understand how to limit the likelihood and severity of negative outcomes while simultaneously increasing the upside.
As a landlord, you’re in a business where there is significant risk, and upside. How you handle certain factors will ultimately determine how successful and profitable you are as a real estate investor. Do you know where to begin?
5 Tips for Reducing Your Risk
Though you can’t cancel out all risk, there are some actionable steps you can take to limit negative outcomes in your rental property investments. Here are a few suggestions:
Implement Strong Screening Procedures
You can dramatically reduce risk in all facets of your rental property investment business by weeding out bad tenants and finding reliable renters who will pay on time and keep your property in good shape. This process is known as tenant screening – and the better you are at it, the more positive your results will be.
In addition to credit checks and background reports, you can get a good feel for who a prospective tenant is by asking for the contact information of their current and previous landlords. Just make sure you contact both. If the tenant is a nightmare, it’s possible that the current landlord will give you a glowing review just to get them out.
“But the previous landlord, from a property where the tenant no longer lives, will give you the honest scoop,” real estate investor G. Brian Davis says. “You should still contact the prospect’s current landlord, they may well level with you, but take their word with a grain of salt. Dig deeper, contact not one but two of the applicant’s landlords.”
Draft Meticulous Lease Agreements
Never assume that a tenant will take care of your property or follow verbal rules and requests. If you want to ensure something is done/not done, it must be in writing.
A meticulous lease agreement will serve you well. You’ll have even better results if you go through the agreement with a prospective tenant in a line-by-line fashion.
Conduct Thorough Walkthroughs
Walkthroughs are more than mere formalities. They should be treated as integral components of your risk-reduction strategy.
There are two walkthroughs that should take place with every tenancy. A failure to complete one or both could cost you.
The first walkthrough takes place as a tenant is moving in. This walkthrough is designed to identify any pre-existing issues. You should take pictures of the property and make meticulous notes. (This protects you later on, should a tenant try to claim something was broken or defective before they moved in.)
The second walkthrough takes place as the tenant moves out. This walkthrough is used to identify any issues so that you know how much (if any) of the security deposit you need to use for repairs.
Secure the Right Insurance Policies
Nobody likes buying insurance, but the right policies are a landlord’s best friend. Consider getting a landlord insurance policy and possibly adding on riders like guaranteed income insurance, flood insurance, emergency coverage, and additional construction expenses.
Hire a Professional Property Management Service
You’re probably thinking: “This sounds like a lot – just to minimize my risk!” But here’s the thing: You don’t have to take all of these steps on your own. In fact, you can streamline almost all of them by doing one simple thing: hiring a professional property management service.
Property management companies are designed to take the challenging and time-consuming tasks you don’t want to do and take care of them on your behalf. Some services, like Green Residential in Houston, even offer things like tenant placement, rental income, and satisfaction guarantees. Now that’s how you limit the downside!
Enjoy More Upside
Limiting risk does a few things for you. First off, it minimizes the chances of something going terribly wrong and putting your finances in trouble. Secondly, it reduces stress and anxiety – freeing you up to make better and more constructive decisions in your personal and professional pursuits. But perhaps most importantly, it gives you a powerful business model and system that you can apply to expand your portfolio, build your business, and ultimately enjoy a lucrative and semi-passive stream of income for the rest of your life.