Here’s Why Real Estate Investors Lose Their Hair

Written by: David Wilkening

Let’s take on the negative and do some worrying. Why? Because the real estate market looks good right now.

That means more activity everywhere. Real estate values and home prices are rising right now. Interest rates are almost begging you to borrow. And, of course, most of us retirees have thought or dreamed about the concept of supplementing our inflation-ravaged Social Security.

I don’t say inflation-ravaged lightly because it’s not pleasant to look at all the areas where inflation is going up. Food. Housing. Where is it not going up? And your Social Security gets those small increases that never come close to inflation, do they? That’s a worry in itself.

But even more worrisome is what can go wrong when you’re in the real estate business. That does not mean there is nothing you can do about it, however.

Now let’s see what can go wrong in addition to your present tenants both losing their jobs and unable to pay their rent (bad enough when you have to get new tenants):

—For one obvious example: consider the recent tornados that devastated Oklahoma. You say you don’t live in Oklahoma. How about Florida or California? Hurricane and earthquake hotspots. This brings up the question of no rental income if you suffer property damage. The obvious answer is you will have to buy insurance. And it also helps to have an emergency fund on hand for the cost of repairs (novice landlords are notoriously unaware or simply try to ignore this possibility).

—An even closer enemy with a far friendlier face: the institutions that have discovered the profit in buying single-family homes. They are now responsible for buying up almost one third of all homes, according to the Campbell/Inside Mortgage Finance Housing Pulse Survey. Your only answer is local knowledge they often don’t have. So you buy smarter (not always easy but if you want to make easy money, invest in a savings account).

—Your renters are not paying you enough to cover your mortgage. You think that’s ok because your investment property is going up in value. But what about another housing downturn? You should be prepared to find other sources of money to tide you over until things get better (maybe another loan, not likely, but what about help from sympathetic  friends or relatives?).

—You have put all of your money into one asset, a two-unit apartment building in an area where a major developer just completed a massive 930-unit project. Worse yet, the new apartments are very affordable and cost less than your rent. The new units also have many amenities such as a gymnasium and an Olympic pool. You will have to find ways to complete such as offering shorter leases or some sort of financial incentive (free rent is the obvious one). But even with your most creative ideas, you still face some future money-losing months. It’s too late now but you realize diversification would have been better.

All of this means you have to be prepared not only for success but for failure as well. You are not a big and sometimes fat institution that can afford much loss, Since you are on a lean diet, be sure you have a backup plan for the lean times that you can only hope will never happen. ###


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Here’s Why Real Estate Investors Lose Their Hair

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