Owning a rental property, otherwise known as passive income real estate, can be one of the best ways to accumulate long term wealth. That being said, it can also be the source of many headaches. If you are not careful, you can get into a lot of trouble. Much like other investing strategies, it is important to plan for the unexpected. What you will find is that the unexpected happens much more than you may realize. Between weather issues, emergencies, repairs and vacancies, you are likely to encounter one or more of these problems. If you are not prepared for anything, sooner or later you will run into trouble.
Weather problems will often come out of the blue. When they hit, they can be crippling. Regardless of what part of the country you invest in, there are different weather concerns. The Northeast will have their snow and ice in the winter. The Midwest has tornadoes to deal with and the West coast is always on call for earthquakes. You may go seasons without giving these a second thought, but if they hit, you will be forced into scramble mode.
As with the case of weather, you never know when there will be an unexpected emergency in your property. Fires, damage to roof, auto accidents and tenant injuries are certainly the exception rather than the norm, but they do happen. While you can’t do much to avoid these issues, you can put things in place to prepare yourself. If you haven’t looked at your lease in a while, you should give it a glance and see exactly what is covered. It is also a good idea to take a look at your insurance coverage and see what is on your policy. Your property value and insurance needs may have changed quite a bit since you last reviewed your policy. With every new tenant, you should see what is covered and what may need to be tweaked. One major storm or one major accident can put you behind the eight ball if you are not properly covered.
Weather and property emergencies may be extreme items you have to deal with, but there are many smaller issues that can come your way from time to time. Almost every property will have at least some repairs from lease to lease. It is important that you allocate some of your budget to brace for when these are needed. Many of these repairs will be minor in nature, but you never know when your furnace will stop or some other major item will need to be replaced. If you don’t have the funds to repair or replace these, you will turn to credit cards or other sources that that will reduce your monthly cash flow and make a once promising property look average.
You never know when a tenant is going to have an unexpected problem. While things may be going great at first, there is nothing preventing them from going awry later on. At that point, there really isn’t much you can do to make your tenant send their rent in. Your lease offers you some protection, but from the time they are late until the time they are evicted, somebody has to pay the mortgage. Dealing with payments coming in a few days late is one thing, but having to cover the mortgage is another. If you do not have funds to cover it, you can face foreclosure in a matter of just a few months. Not only that, but the late payments will be a stain on your credit.
It sounds simple enough, but you should have at least three months of payments in place in the event these unexpected issues arise. If you don’t use these funds, you can roll it over to the following year. You can rest assured that at some point in the course of your ownership that there will be a major event that causes you to use them.
If you are in the real estate business long enough, you will see everything. It is far better to have less properties and more reserves than more properties and minimal reserves. Having a full portfolio is great, but only if you have assets in place to protect yourself. One bad property can cripple your business and leave you searching for financing options on every future deal. As a real estate investor, you should always expect the unexpected.