8 Real Estate Investing Risks

The benefits of real estate investing can’t be overstated—from financial freedom-enabling cash flow to generational wealth-building equity through appreciation, real estate investing is one of the best investments on the planet. But, there are some serious real estate risks that can’t be overlooked.

Worry not. After over a decade of investing and falling into these traps myself, I’m sharing the biggest risks of real estate investing with you, along with ways to avoid them. Ignore these risks, and you could ruin your real estate deal. Avoid them entirely, and wealth-building will be easier than you thought! 

1. Property Repairs That Ruin Your Cash Flow

When you are new to real estate investing, it is very easy to get excited about the anticipated cash flow of an investment property. This property will provide additional monthly income for you, which may one day lead to an early retirement. You should be excited about this, as real estate investing is the most predictable path to financial freedom.  

However, the most common mistake newer investors make is not budgeting appropriately for repairs.  One large repair on a rental property could wipe out your cash flow for a year, or worse.  This is why it’s vitally important to obtain inspection reports prior to buying a property and to hold reserves for repairs that come up during your time owning an investment property.  Repairs may start off low in the first year or two, but over time as the home ages, repairs expenses will increase over time.  

How to Avoid This

This is why Rent To Retirement focuses on new construction, build-to-rent homes that dramatically limit the amount of repairs that will be needed within the first ten years of ownership.  

We recommend keeping at least $5,000 in reserves for each turnkey real estate investment property you own.  If you are not buying turnkey rentals that were newly built or recently renovated, we recommend increasing your reserve amount to $10,000 or even $15,000.

2. Investing in Low-Income Areas

We all hear about location, location, location, but what does that actually mean?  Many novice investors like the idea of buying cheaper properties because it simply takes less money to put down to buy them.  On paper, the numbers could look very attractive on a cheap home that has high rent and cash flow.  However, very seldom do the cash flow numbers actually work out as expected when buying cheap homes that naturally are in low-income areas.  

Tenants tend to damage the property significantly, causing more repairs, they move more often, increasing vacancy times, and the eviction rate is significantly higher on cheaper homes.  Furthermore, these types of assets do not appreciate very well over time, if at all.  If you are investing in low-income properties, you must run your analysis carefully with much higher vacancy, maintenance, legal and capital expenditure costs over time. You should not factor in more than a 1% to 2% appreciation rate each year. Do not fall into the trap of buying cheaper properties thinking they will cash flow consistently over time.

How to Avoid This

Look for rental properties in safe, economically stable/growing areas, with responsible local governments. The Rent to Retirement team has located top investing markets across the country with strong appreciation and cash flow potential. Interested in learning more? Schedule a free consultation!

3. Investing in the Wrong States Where Tenants Have Total Control

Regulations are constantly changing both locally and nationally.  There are more and more states moving in the direction of statewide rent control and increasing taxes for landlords.  This makes it very difficult to raise rents over time to keep pace with inflation and to own a property that has positive cash flow.  

Many of the coastal states have legislation that is more favorable to tenants over landlords, reducing the landlord's ability to evict tenants when they stop paying rent and exposing the landlord to more liability.  We have all heard the horror stories of professional tenants who squat in homes for over a year without paying rent, leaving the landlord in a very bad financial situation with little recourse.  

How to Avoid This

At Rent To Retirement, we specifically focus on markets that have landlord-friendly legislation and favorable tax structures to set our investors up for success long term. Check out our full list of the 13 most landlord-friendly states in the US!

4. Over-leveraging Could Put You at Risk of Foreclosure

Leverage (debt) is a key component of scaling a portfolio over time.  Leverage is a tool that should be used responsibly based on each individual's financial situation to earn a higher return on investment than they would buying a property with all cash. It allows them to stretch their capital further across multiple investments vs allocating all their capital into only one investment property.  

However, too much leverage can be overly risky, especially if someone is using loan types that have fluctuating interest rates or other terms.  The most successful investors understand all the possible loan options they can use prior to buying an investment property, and they have a long-term plan of how to properly manage the debt service due on each property.  

How to Avoid This

We highly recommend speaking with lending professionals to fully understand all your loan options available for each investment property you are considering.  Lending is constantly changing every day.  It is essential to know which type of loans you would qualify for and which loan types are too risky.  

Leverage can be a very creative tool to help you grow your business quickly.  We often come across lending options where an investor can buy properties with as little as 5% down on multiple investment properties and DSCR loans that allow someone to finance a property that may not qualify for conventional financing.  However, it is very important to know how to properly run your analysis with those types of loans and what the long-term risks are.

5. Running Numbers on Year One Only and Not Thinking About Future Performance

The beautiful thing about owning rental properties is that you can likely keep pace or potentially outpace inflation as the cost of living increases, which leads to an increase in rents each year.  This means that your cash flow should increase over time ideally.  You also build equity over time through the home appreciating and the loan being paid down each year.  

However, you also would expect expenses to increase over time as well.  Do not fall into the trap of just paying attention to the positive of appreciation and rent increases and forgetting to budget for maintenance cost increases!

How to Avoid This  

Rent To Retirement offers a free Wealth Calculator that allows you to track the performance of your rental portfolio. It also forecasts future appreciation, cash flow, and equity, incorporating maintenance increases over time.  This is a valuable tool that allows our investors to be forward-thinking about their investments instead of just looking at year-one performance.

6. Not Understanding the Regulations and Laws around Being a Landlord

Investing out of state is one of the best ways to diversify your portfolio and access opportunities that may fit your goals better than your local market.  It allows you to intentionally choose markets that have the best cash flow and appreciation instead of being subject to the dynamics of your local area.  However, with long-distance investing, also comes a whole new set of tax and legal parameters that you must be aware of.  

How to Avoid This

This is why Rent To Retirement partners with local teams in each area we operate to ensure we have boots-on-the-ground teams that are familiar with local laws and regulations when managing the property.

7. Not Building an Adequate Team to Support You

We have all heard the saying, “Your network is your net worth.”  That couldn’t be more true when building a rental portfolio business.  The investors that are the most successful approach investing as a business instead of a hobby.  You must have the right real estate-specific accountant, attorney, lender, property manager, advisor, insurance provider, etc., to provide clear guidance to you.  They must be familiar with real estate investing topics, and they must fully understand exactly what your goals are to set you up for success.  

Having the right “dream team” of real estate professionals allows you to confidently grow your portfolio in a systematic approach instead of randomly buying an investment property and hoping for the best.  

How to Avoid This

Don’t try to be a one-person team.  Work with those more experienced than you to leverage their expertise!  When you work with Rent To Retirement, you gain immediate access to the team of professionals we have curated over the past 15 years of investing to set YOU up for success.

8. Setting Up the Wrong Legal Structure (or No Legal Structure) to Protect You

Know how to protect your ASSets!  Having the right legal structure in place is essential to protect both your investment property and also your personal assets.  You’ve worked extremely hard to earn the money that you invest with.  Don’t skip any necessary steps to protect your investments from potential future liability.  Having the right legal structure in place to separate your rental property from other assets you own and your personal wealth is of vital importance.  

How to Avoid This

Having a savvy real estate attorney to advise you on this topic is crucial. Looking to set up an LLC? We recommend our long-time friends at Nevada Corporate Headquarters who have helped us set up hundreds of LLCs not only for our clients but for our own portfolios!

Build a Foolproof Real Estate Portfolio 

Hopefully, this article has provoked some thoughts on the right way to either start or scale your real estate investing portfolio.  These are the eight key mistakes we see new and experienced investors make that can be counterproductive in accomplishing their goals.  

Real estate investing is the most predictable path to wealth creation.  However, there is a right way and a wrong way to do it.  Don’t try to reinvent the wheel or be a lone ranger.  Success leaves clues, so just follow what the successful people are doing.

If you are looking for an easy way to invest in some of the best markets today with a guide to set you up for immediate success, please reach out to our team at Rent To Retirement via the link below.

To your success,

Zach Lemaster - CEO, Rent To Retirement