Warning! The Risks Of Owning Rental Property
Hey everybody! Spencer Sutton here with gkhouses and today I want to talk to you about the risks of owning rental property.
Whether you are a home owner who is just renting your house or an investor who is actively seeking out multiple properties to rent out. Regardless you are in business.
In the investment world, there are always going to be risks. So I want to talk to you about some of the top risks that are involved in owning a rental property.
The First Risk
One of the most important risks in owning rental property is if your tenant were to stop paying rent.
We have done several owner surveys over the past few years, and we always ask this question, “What are your biggest fears when renting out your home?”
The top two are consistently that the tenant won’t pay and fear of them tearing up the house.
Sometimes the tenant not paying isn’t the biggest deal to an owner because they will collect eventually. This becomes a big problem when the owner is paying off a mortgage with the tenant’s rent and they need the money on schedule every month. With that being said, one or two months of non-pay can have a big effect on your cash flow.
If this happens you will have an eviction process dependent on where your property is located. Hopefully, you can get the tenant back on track. We try to understand that are all kinds of life circumstances that can happen. Even if the tenant went through the screening process with flying colors, they could lose a job or have some type of personal crisis that could restrict them from paying rent.
The second Risk
The second one I have already mentioned is that the tenant tears up the house. They don’t treat the house like you would treat the house.
Hopefully, if you are renting your house you set aside a security deposit. The security deposit is usually equal to one-month rent and could help you pay for a portion of any kind of damages. Although sometimes a tenant will tear up the house and cause damage that the security deposit will not cover. In this case you will have to decide whether to pay for it out of pocket and get it ready to re-rent or you could sell it.
We find that this happens when the screening process is not what it should have been. You may find a tenant that seems great but some further digging could find that they were not so great in their previous rental.
The Third Risk
The third risk is a law suit. This is ones that I’ve had to deal with over, I’d say, probably two to three years ago.
I had to deal with this about two or three years ago. There was a tenant in one of our houses who threw a party. He had a gentleman that was hanging out on the front porch, he was intoxicated, and he fell off of the front porch on the ground. The gentleman sued us. He sued me as the owner and gkhouses as the property manager. This was drug out over quite some time.
It is difficult because you are allowing other people to live in your home. Now, you will have insurance to help fight this, but just know that it is a risk and some things can go wrong.
The fourth Risk
The next risk is that you’re unfamiliar with certain landlord-tenant law.
If you are unfamiliar with landlord-tenant law, you could easily so or say something that is illegal. This can actually get you in a lot of trouble. We have seen this multiple times throughout the years.
Here in Birmingham, Alabama, I remember going to listen to an investor. He had a lot of houses, probably around 200. He mainly talked about all the different ways that he would collect rent it the tenant was falling behind. He would do crazy things climb the roof and put things into the plumbing ventilation to get the tenant to pay. He took all of these actions that you wouldn’t think anyone would do. If you are going to do things as brave as this investor, it is super important to know your boundaries. These boundaries come from the landlord-tenant law.
What he was doing was most definitely not right, but even if you just messed up a little bit, you could get in trouble.
The fifth Risk
And then the last risk I would say is that real estate is not all that liquid. You cannot just cash it out like you can stocks or bonds.
If you are thinking of selling your rental while your tenant is still living there, then you should be looking for an investor. An investor is going to be a specific person that wants to own rental properties. They are more than likely not going to pay market rate, and so it’s not merely as liquid.
The real state market is currently doing good, and this is great when you are trying to sell the house. When the tenant moves out, you will have tp fix up the house and then sell it.
Rental properties are not as liquid as other investment types.
Those are the risks of owning rental property.
If you have any questions at all, don’t hesitate to reach out. You can find us at gkhouses.com. You can also email me directly at [email protected]
I’m happy to help and best of luck to you.