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6 Big Problems When Investing In More Than 1 Rental Property
When a rental property of yours is generating $100 each month in positive cash flow, it is understandable when you are seriously considering scaling your landlording business by acquiring more rental homes.
Some might feel that even if $100 cash inflow fully translates to $100 profit, a tenth of a thousand is hardly tempting to multiply that number…
Such shortsightedness is without taking into account the home equity in the house being accumulated from rental collected from tenants.
That can be quite a substantial amount.
And we have yet to touch on the high likelihood of value appreciation that would further boost home equity.
These monies that are “locked” up in the house can eventually be cashed out via proceeds of a sale or via a home equity loan.
Since there are various advantages of investing in rental property, should you really invest your time and resources in more than one property?
Here are some key issues to ponder before making that step to the next level.
The problem of vacancies is not a myth. Not enough new landlords put enough thought into it.
Many people assume that tenants are a given after gaining control of rental property.
When reviewing vacancy risks, think about:
- Seasonal nature of tenancy
- Vacancy rates in the area
- Condition of property compared to others in the neighborhood
Some might argue that it is because of these risks that one should invest in more rental property. More rental homes effectively diversify the negative impact of 1 house on the bottom line.
This is true when your other rental properties are in different area.
If you own 5 rental properties in the same area, all 5 could be hit when vacancy rates rise in the area.
You emergency funds might be able to tide you through a few months when you have 1 vacant house. But what if you have 3? Can you realistically keep up with mortgage payments in view of the drastic drop in rental income?
2) Major repairs
Landlords with a long term vision like to spend big on important items that will last a huge distance.
This not only give the landlord and tenant peace of mind, but will also be more cost efficient over the long run. Savings from constant repairs will justify the big initial outlay for more quality stuff.
Things like roofing, heating systems, piping and foundation works, etc, are just some of the things that will be worthwhile to spend more on.
Yet even if you bit the bullet and spend on quality, sometimes unexpected damages will require extensive repairs… or even worst… outright replacement.
With just one rental property to manage, major repair requirements might arise once in a while.
But with more properties, the odds of them occurring will be considerably more.
Most tenants are considerate and do feel an obligation to pay rent as and when they are required to pay.
So much so that many landlords and property managers take them for granted.
You will only realize how valuable good tenants are when you run into one that reminds you of the devil himself.
Tenants who pay late will cause problems to your cash flow. And that is just the best case scenario of the bad tenants.
Tenants who outright refuse to pay will cause much bigger problems as you need to kickstart the eviction process… which can be a real nightmare.
From start to finish, the costs of evicting a tenant can be anywhere between one and three months worth of rental income.
These include real expenses and opportunity costs as well. And let’s not forget the mental and emotional turmoil you might have to experience.
An important stage of renting is to conduct proper tenant screening processes so that you do your part in minimizing this risk to as small as possible.
Forget the mumbo jumbo that “guru” continuously claim about no money down turnkey properties or any other variances of creative financing.
If you are a single investment property owner, the odds are that you are simply not ready for the mess of what is creative financing.
Borrowing from traditional lenders is still your main route towards financing your purchases.
And if you don’t already know, banks don’t have a good impression of real estate investors. Especially on those that have the full intention of expending their real estate empires quickly.
This is why you might find borrowing from lenders more challenging when you are seeking loans for investment property compared to your first house.
To briefly touch on this, you might find that a rental property might get a lesser loan-to-value (LTV) compared to an owner-occupied property. And that LTV can fall even further as you move on to your second, third, and forth property, etc.
5) Time commitment
You might feel that you are living the life as you have so much free time with just one rental property under your belt.
The payment checks keep coming in and you are hardly breaking a sweat.
You can be sure that you will become much busier as you increase the number of houses to manage.
Many tasks demand your attention. Sometimes just one big problem can drive you crazy.
And as previously stated, the more properties you own, the more likely problems are going to come up.
6) Cap on tax benefits
After getting your feet wet with the tax benefits with owning a rental property, the idea of fully milking these tax benefits might come to mind.
However, having 3 rental homes don’t necessarily mean that your tax benefits multiply by 3.
For example, there is a ceiling of how much losses in real estate can be used when computing your tax obligations for the year.
So do run the numbers carefully if tax benefits are one of the key elements on your mind when considering to acquire more rental property.
And when in doubt, always consult a qualified accountant for advice.
When you are expanding your business, tax planning has to be an issue to take seriously so that you can maximize your real profits and also not run afoul of the law.