Reducing Risk in Real Estate Investing
The beginning of the new year is the perfect time to review your investments and reposition your portfolio. If certain investments have underperformed during the past year, look into the history and find out why. Then make a plan for the coming year. Reevaluate your strategy. For instance, if you’re heavily invested in stocks and bonds, move some of your investment money into real estate. Real estate had a booming year in 2020, thanks in no small part to the lowest interest rates on record. Experts predict that real estate will continue to be one of the most lucrative investments you can make in 2021.
What’s Stopping You?
The two most common reasons people put the breaks on buying real estate investment properties are lack of cash for the down payment and uncertainty. Let’s look at each one and see how to resolve the issues.
Lack of cash for a downpayment is a hurdle that can almost definitely be solved over time. What you need is a long-term plan for acquiring enough cash for a down payment, which is going to be in the range of about $20,000. As we’ve talked about in previous blog posts, there are lots of ways to get extra money to invest. The most obvious one at this time of year is your tax refund. Commit to setting aside your 2020 tax refund toward your next down payment. Next, it looks like many people will be getting another stimulus check. If you qualify, decide that you’ll put that money into savings, too. Take a look at your paycheck. Can you set aside a certain percentage from each one and put it toward a down payment? Do you have a hobby that you could monetize to make extra money on the side? Do you have unused assets that you could sell, like a jet ski, paddle board, second car or electronic device? Don’t sell things you truly use or need; but if you get rid of some extras, you won’t miss them when you’re sitting back collecting passive income from your turnkey rental property. The point is, $20,000 won’t miraculously appear as a lump sum in your bank account overnight. But it’s really not a lot of money to collect little by little, as long as you stick to your savings plan.
The other thing that stops a lot of people from buying real estate investment properties is uncertainty. Uncertainty will stop you from doing a lot of things in life that you should be doing. There’s a saying that goes, “If you take too long to decide, then the decision will be made for you.” Is that how you want to live, like flotsam in the water, letting the currents just carry you along, hither and thither? Of course not. You want to be decisive; you want to be a person of action. You don’t want to be stuck in analysis paralysis, as one of our successful investors talked about in a recent interview. She said that so many people she met were wannabe investors, but they just couldn’t get to the point where they took action. They spent so long analyzing the pros and cons that they became paralyzed with uncertainty.
Uncertainty is usually caused by fear of making a mistake. It’s almost impossible to make a mistake investing in real estate. It’s not guaranteed by any means, but you’re buying a tangible asset. Real estate is not like a stock where you could wake up tomorrow and find that it’s almost worthless. Real estate holds its value. Usually it appreciates in value. And if you ever change your mind, you can always sell it. Basically, whatever is making you uncertain about investing in real estate is just a hindrance to you taking action on something that could be positively life altering. Take the plunge. Invest now.
More is Better
This is not to say that investing in real estate is risk-free. It’s one of the safest investments, but no investment is completely free of risk. However, with real estate investments, more is better. When you own multiple real estate rental properties, you reduce your risk across the board. One reason is because the more properties you acquire, the sooner you can take the profits and put them toward paying off other properties. This frees up even more cash for additional purchases. Owning multiple properties over time presents more opportunities to leverage your money and your real estate investments. Following are more ways you mitigate risk when you invest in multiple real estate rental properties.
Greater Protection Against Vacancies
We’re proud of our property managers. They do a fantastic job of finding good tenants and minimizing gaps between lease agreements. Still, vacancies can and do occur, no matter where you invest. And when you have a vacancy, you have no rental income. That’s always an issue because of course you’re still responsible for paying the mortgage, the property insurance and assorted other holding costs. But when you own multiple turnkey rentals, you have greater protection against vacancies. Since each property is cash flowing positive, you can use that income to cover your temporary negative cash flow from the vacant property. You may not make a profit for a month or two while the vacancy is occurring, but at least money won’t be flowing out of your own pocket.
Speaking of property managers, we use the same company in each of our various markets. So if you’re an investor in our Cleveland area market, you’ll have the same property management company for all your properties there. The same goes for our Memphis market, where we’ve recently increased our presence. This simplifies and streamlines relationships for you because you’ll be dealing with the same people, the same company, the same processes and the same portal where you’ll access all of your landlord documentation. This reduces risk in a way because there’s less chance for error when you’re working with the same people and processes across multiple properties in a given market.
Greater Odds of Selling
When you do purchase multiple real estate rental properties, it still makes good sense to diversify within your real estate portfolio. For instance, if you own two houses in Maple Heights, consider buying your next one or two in a different zip code in Cleveland. Remember, every municipality has different bylaws and development plans. By diversifying, you reduce your risk when it comes to surrounding developments and appreciation. If you or your heirs have a financial turn and need to sell in the distant future, you’ve have greater odds of being able to choose one or more properties and recoup your investment as well as profit in the deal.
Buying in multiple states allows you to increase your property appreciation. States vary considerably in terms of property valuations. It’s nearly impossible to find positive cash flowing rental properties in some states. That’s why we are very choosy about where we invest. We find properties in areas where we can offer value to our investors at reasonable prices. The more states you invest in, the less risk you carry in terms of losing value. The more rental properties you own in different states, the more appreciation you can count on.
Often, when we have an introductory call with potential investors, they say their ultimate goal is to buy several turnkey properties so they can eventually either replace or subsidize their income. Many see investing in turnkey rentals almost like an insurance policy, where if something should happen to their salaries, they have still passive income. They’re not wrong. But as we explained in a previous blog post about realistic expectations, one turnkey rental won’t turn you into a wealthy individual overnight. However, multiple turnkey rental properties can certainly provide enough income to live on and then some. But you have to stay on track. In order to achieve true financial freedom, stick to your plan of owning several positive cash flowing turnkey rental properties. Give us a call. We’ll help you do it.