Rental Real Estate Investment Risks?

Question

Hi! I'm new to remote Rental Real Estate Investment. I've owned rental property locally here in Cali in the past but it's been a number of years and it was only ever one at a time. I've been following the podcast for a while as well as a few others (listen money matters and passive real estate investing).

As I was discussing with my wife the idea of building a real estate portfolio in addition to our existing investment (high interest savings, stocks , 401k , IRA) I had a hard time articulating the obvious risks involved w.r.t to losing meaningful amounts of money (15-20k plus)

Im planning on starting with something turnkey for a remote property (which I have tons of questions about but that's for another post). My understanding is that if the property is properly researched and the operating budget allocates enough for vacancy and repairs ) while still cash flowing apart for the possible inability to liquidate your initial investment due to a market down turn or lack of overall appreciation.

Seems like as long as we plan to hold onto the property for the long run (or atleast until there is meaningful amount of equity ) and we are cashflowing we should be fairly safe?

James Wise · Answer

The following punch list should help you keep your risks as low as possible.

• Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
• Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
• Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
• Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
• Make sure your property manager is a licensed real estate brokerage.
• Google Clayton Morris Lawsuits and/or Morris Invest Fraud for a cautionary tale of what not to do when buying turnkey real estate
• Understand you can not eliminate all risk, only mitigate it. If you are risk averse, real estate, (especially out of state) is not for you.

Jonathan Oh · Answer

@Premesh Purayil That's right, if you're planning on buying turnkey, plan to hold for a minimum 5 years and always be conservative with budgeting. But a lot of the actual costs will come down to your property manager and what type of property and area you invest in.