Rental property investment can be an attractive way to generate income and build wealth over time. However, it also carries risks that must be properly managed. With the right strategies, rental properties can provide stable returns plus capital growth for investors taking a long-term, prudent approach.
Here, we’ll explore the various risks inherent in rental property investments and provide key strategies investors can employ to mitigate those risks for bigger returns. Market conditions will fluctuate, but rental property portfolios can offer reliable income streams and profitable assets through ups and downs when risks are addressed upfront and managed successfully over time.
The risks with rental property investments
Vacancy risk is a major concern for rental property owners. There will inevitably be periods when your property sits empty without tenants, meaning no rental income but ongoing expenses. Vacancies drag down returns, and while strategies like setting aside reserves and securing tenant references help, vacancies remain an inherent risk.
Maintenance and repair costs are also unavoidable in rental properties. Appliances fail, pipes leak and damages occur, leading sometimes to higher costs than you may have been expecting. Similarly, property damage from tenants is another unfortunate risk landlords face, whether accidental or caused by irresponsible tenants who may damage the property beyond normal wear and tear. Screening tenants helps but unfortunately can’t prevent all damage.
Market fluctuations
Changing housing market conditions pose longer term risks for rental investors. Appreciation may stall in down markets and local demand can fluctuate, so when you’re investing it’s important to be prepared for those moments that won’t exclusively involve profits and big returns. Remaining flexible and waiting out downturns is key. As Financial Planner Adam Reeves notes:
Building wealth is a long-term endeavour. A financial plan keeps you focused on the bigger picture, reminding you of your long-term objectives even during short-term market fluctuations or economic downturns. It instils discipline and patience, key traits for successful wealth-building.
Mitigating risks for higher returns
However, it’s not all bad news and with a bit of forethought and some strategic steps, you can mitigate some of the risks that come with a property investment. Thoroughly screening tenant applicants, for example, is one of the best ways to reduce risks like non-payment of rent and property damage. Before handing over the keys to your buy-to-let, be sure to check credit scores, references from previous landlords, employment records and their criminal history, and any other relevant background factors, to choose reliable, responsible tenants who are less likely to cause issues.
Landlord insurance policies are also essential to limit financial risks from vacant periods, maintenance requirements, tenant damages, and lawsuits that might arise in the future. While no landlord wants to anticipate these complexities, the fact remains that it’s better to be prepared for all eventualities. Make sure your policy has adequate coverage for factors such as lost rental income, repairs, and liability protection, and review your contract annually to make sure it’s still providing the best coverage.
Build a reserve fund
It’s tempting to enjoy your profits immediately, but setting aside reserves from your rental income for the unexpected helps manage these costs without needing to dip into your savings. Try to have 3-6 months of reserves so you can cover costs when units are vacant or major systems fail, such as the property needing a new electrical unit or major plumbing works.
Keeping up with preventative maintenance and timely repairs helps minimise major damage and costs long term too. Annual inspections and tuning up appliances or upgrading systems on schedule reduces breakdowns and means you can plan for these expenses ahead of time rather than being side-lined by an unexpected bill.
Using property management companies can reduce headaches, especially for long-distance landlords. It also helps ensure you stay on top of any legal requirements as a landlord. However, bear in mind it also cuts into returns, so weigh the costs versus the benefits closely to see if the arrangement works for your needs.
How to increase profits
Leveraging appreciating property values over the long run is a key way for rental investors to build wealth. The equity and value of well-maintained properties have risen over decades, and targeting appreciating markets maximises this.
Another way to boost your profits is to become an expert at managing your finances, debt and expenses carefully which optimises cash flow. When you’re navigating funding for your buy-to-let, seek loan terms that leave positive monthly cash flow and refinance when possible, to lower payments. Working with an accounting specialist will also help you deduct all eligible tax expenses.
Increase rent strategically, when possible, which provides a welcome revenue boost without sacrificing low turnover. But be sure to keep rents competitive based on market comparables, and reward good long-term tenants with discounts where possible to ensure your property stays occupied for as long as possible. After all, it’s better to have consistent income at a slightly lower rate than to outprice your current tenants and be left with an empty property that you then struggle to let out to others.
Another way to ensure higher profits may actually lie in spending money. Upgrading your rental properties with features like new kitchens, sleek bathrooms and upgraded flooring allows landlords to achieve higher rents and demand from tenants seeking modern and stylish properties. But focus on renovations that will deliver meaningful ROI based on the market.
Wise management is key
Just as with any investment, buying a rental property carries inherent risks from maintenance expenses to troublesome tenants. But prudent management and smart financial strategies can optimise your returns and build wealth over time. Rental property ownership requires research, preparation and active involvement, but it can play a vital role in creating lasting wealth and income when investors enter with eyes open to the risks and with a plan to manage them.
Approached carefully over decades, with the assistance of professionals in the field, rental properties offer stable returns plus profitable assets, and can form part of a successful investment strategy.
