Pretty much all financial experts insist that a pillar of financial health is having a diversified investment portfolio. This can mean investing in alternative assets like real estate.
There are several benefits to investing in real estate, including but not limited to, asset appreciation, tax advantages and a passive income stream.
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But make no mistake — real estate investments are not a guaranteed win. Like any investment, real estate carries inherent risks and a number of things could go wrong if you’re not careful or lack a calculated strategy.
GOBankingRates spoke with real estate expert Chad Breeden, owner and founder at Sentry Real Estate, to find out seven reasons your real estate investment could flop and potentially end up costing you money.
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Poor Research
Listen up: If you don’t have a comprehensive understanding of the local real estate market you’re investing in, you could be picking a neighborhood that is depreciating in value.
“This can lead to smaller returns or losses later on when you sell the property,” Breeden said.
Poor Cash Flow Management
A rental income is an investment that requires financial upkeep. You will have various expenses (e.g, property taxes, maintenance, home insurance) and you need to ensure that the income stream (post-income taxes) from the rental property covers these expenses.
“When your rental income doesn’t cover your expenses, you can quickly face financial trouble,” Breeden said. “Unexpected vacancies or repair costs can make it even harder to keep up with bills, leaving you struggling to make a profit.”
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Underestimating Repair Costs
Part of your job as a landlord is to cover repairs. It’s essential to get a home warranty to help pay for them, but warranties won’t cover everything.
“Sometimes repairs can cost more than you expect which will cut into the money you make from the investment,” Breeden said. “If you don’t plan ahead for these costs, you could find yourself spending more than you’re earning.”
Not Factoring in Property Management Costs
Perhaps you have the bandwidth to manage your property, but this is a time-consuming and often complex job. You may need to hire a property manager, and that’s not cheap.
“If you’re not managing the property yourself, hiring a property manager adds extra expenses,’ Breeden said. “These fees can reduce your profits, especially if you haven’t budgeted for them ahead of time.”
Bad Location
This is part of the research factor, but deserves it’s own explanation. If you choose a location to invest in that doesn’t have a high livability score (for example, it has poor schools or a high crime rate), the property could be harder to rent out or sell down the road.
“This will slow down your cash flow and delay any returns on your investment,” Breeden said.
Over-Leveraging Financing
If you need to take a loan out to buy a rental property, make sure you can take it on without sinking into debt.
“Borrowing too much money to finance your property can backfire if interest rates rise or property values drop,” Breeden said. “This can increase your monthly payments, making it hard to avoid foreclosure.”
Ignoring Market Trends
The housing market fluctuates and you need to be constantly looped in to the trends.
“Failing to follow real estate trends like rising interest rates or changes in buyer demand can hurt your investment,” Breeden said. “It’s important to stay informed or you could be left with a property that’s hard to sell or doesn’t increase in value.”
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This article originally appeared on GOBankingRates.com: 7 Reasons Your Real Estate Investment Could Flop
