Most investors are optimistic in nature. They think they can turn any property into a home run, regardless of how many people are telling them they can’t. This kind of excitement and positivity works great on certain properties, but can also come back to bite them if they are not realistic. When evaluating a property or your current portfolio, it is wise to temper your enthusiasm at times and think about worst case scenarios. You don’t have to dwell on it, but you do need to know what is possible and more importantly how to prevent it.
If you currently have rental properties, you may think a tenant’s refusal to pay rent is a worst case scenario. This is certainly not an ideal situation, but one you could deal with if you had to. If someone is injured by your negligence or if the house catches fire, you are in for a lot more trouble. While rare, these things do happen. It is true that they probably will never happen, but what if they do? Do you have the proper homeowners insurance? Is the language on your lease strong enough to protect you from tenant injury? Hopefully you will never need to deal with this, but instead of ignoring the possibility, prepare for it.
The same could be said when looking at prospective properties to buy. You may think breaking even or even taking a small loss is the worst that can happen. However, neglecting due diligence could land you a property with significant problems that hurt your bottom line. Not only is there the potential for costly fixes, but if they are bad enough, they could deem the home not fit to sell or rent.
Getting in and out of properties should not be the goal. Looking at them and finding these potential red flags, however, is. You should be looking for water marks in the basement or any freshly painted walls that could be covering something up. Sometimes these issues are very difficult or impossible to discover until after you take ownership, but you need to do everything possible to prevent that from happening. If and when it does, you need to have a contingency in place for the best emergency exit strategy. This option won’t be great, but it will be easier to make if you have at least thought about the possibility.
While cliché, things can always be worse. The next time you bemoan the fact that you didn’t sell for top dollar or may have missed an opportunity to increase the rent $100, take a step back and think about what could have happened. You don’t have to run your business with constant fear, but you should at least have the thought cross your mind on each and every deal. It is the acceptance of these fears that will prepare you for potential complications.
Bad things happen in real estate all of the time. If you do enough deals, you will start to see things that you would have never thought were possible. Plan for the worst and hope for the best. You may get ridiculed and laughed at for taking out the extra home warranty or having an attorney make changes to your lease, but that’s ok. It is far better to have the protection and not use it than be left scrambling when something happens.
The Pitfalls of Optimism