Investment rental properties are great to have when times are booming; however during this time of economic downturn, it also carries several risks.
In fact, there are many investors right now chasing foreclosures and short sales as though these investments carry little risks.
Even though these investment rental properties seem like great deals right now with great rewards, consider some of the risks associated with them.
There are obvious risks associated with investment rental properties.
The most obvious is that you could lose your investment.
However, that could just be the start.
For example, if you purchase a short sale, it often comes with an "as is" clause.
These "as is" clauses mean that no matter what is wrong with the property, the seller has no responsibility for fixing the problems.
Let's take that concept one step further.
If a broken pipe is found on your property, it could cost thousands of dollars to repair.
This simple broken pipe can also lead to the tenant telling you that he / she cannot live in the house until the pipe is repaired.
In that case, you also have lost rent to contend with.
If the broken pipe is out to main pipe, it could take 30 days or more to repair.
Let's also consider an investment rental property that you are not able to rent out.
There are many reasons why that may not be possible ...
bad neighborhood, rent is too high, renter lost their job ...
In that case, your cash flow may become negative.
If you run into a serious cash flow problem, you may decide that you are unable to keep the property.
At that point, you may want to just stop paying your mortgage.
Now, not only are you in jeopardy of losing your investment, but also ruining your credit.
Investment rental properties also take the form of commercial office buildings.
One of the little known facts about commercial loans is that they are subject to judicial foreclosures.
What does a judicial foreclosure mean? It means that the bank can sue you for all of your assets in order to recover their losses.
Consider that you own a residential property and money in the bank.
And, you decide to stop paying on your commercial property.
In a residential investment property, the banks are only allowed to do a "non-judicial" foreclosure, which means that their protection is only secured by that property alone.
No other assets can be tapped to make up any losses.
So now you have also risked losing not just your initial investment, but also additional personal assets.
Depending on where you live, there are also pro-tenant cities.
For example, San Francisco is one of the most notorious cities for protecting tenants ...
as if "all" landlords are greedy slumlords.
Consider a tenant who sues you because of some complaint, real or not.
There are so many free legal resources available as tenant rights groups that the tenant could tie a landlord up in legal battles for a very long time ...
at no cost to the tenant, but certainly a huge cost to the landlord.
One case in particular, which I am aware of, cost the landlord $20,000 moving fees to get the tenant out.
That did not even include legal fees and lost rent.
In fact, there are many investors right now chasing foreclosures and short sales as though these investments carry little risks.
Even though these investment rental properties seem like great deals right now with great rewards, consider some of the risks associated with them.
There are obvious risks associated with investment rental properties.
The most obvious is that you could lose your investment.
However, that could just be the start.
For example, if you purchase a short sale, it often comes with an "as is" clause.
These "as is" clauses mean that no matter what is wrong with the property, the seller has no responsibility for fixing the problems.
Let's take that concept one step further.
If a broken pipe is found on your property, it could cost thousands of dollars to repair.
This simple broken pipe can also lead to the tenant telling you that he / she cannot live in the house until the pipe is repaired.
In that case, you also have lost rent to contend with.
If the broken pipe is out to main pipe, it could take 30 days or more to repair.
Let's also consider an investment rental property that you are not able to rent out.
There are many reasons why that may not be possible ...
bad neighborhood, rent is too high, renter lost their job ...
In that case, your cash flow may become negative.
If you run into a serious cash flow problem, you may decide that you are unable to keep the property.
At that point, you may want to just stop paying your mortgage.
Now, not only are you in jeopardy of losing your investment, but also ruining your credit.
Investment rental properties also take the form of commercial office buildings.
One of the little known facts about commercial loans is that they are subject to judicial foreclosures.
What does a judicial foreclosure mean? It means that the bank can sue you for all of your assets in order to recover their losses.
Consider that you own a residential property and money in the bank.
And, you decide to stop paying on your commercial property.
In a residential investment property, the banks are only allowed to do a "non-judicial" foreclosure, which means that their protection is only secured by that property alone.
No other assets can be tapped to make up any losses.
So now you have also risked losing not just your initial investment, but also additional personal assets.
Depending on where you live, there are also pro-tenant cities.
For example, San Francisco is one of the most notorious cities for protecting tenants ...
as if "all" landlords are greedy slumlords.
Consider a tenant who sues you because of some complaint, real or not.
There are so many free legal resources available as tenant rights groups that the tenant could tie a landlord up in legal battles for a very long time ...
at no cost to the tenant, but certainly a huge cost to the landlord.
One case in particular, which I am aware of, cost the landlord $20,000 moving fees to get the tenant out.
That did not even include legal fees and lost rent.
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