Risks to consider before investing in a rental

Real estate investing entails both risks and benefits, and the larger the risk, the greater the potential for big gains and losses of invested wealth. While real estate is viewed as a more solid investment, becoming a landlord comes with its own set of problems.

Supply and demand, as well as crime, rising debt levels, and increasing unemployment, are just a few of the elements that might affect a landlord's capacity to earn positive cash flow from his investment.

These are the most common risks of investing in a rental and how to avoid them:

• High expenses

Unlike investing in shares, investing in rental property entails significant fees. A deposit, transfer duty, lawyers' and deeds' office fees, and bond initiation costs are all upfront expenses that the buyer must pay in addition to the purchase price. If you buy an R3 million property with an R300 000 deposit and the rest funded by the bank, you will spend around R197 522 in transfer duties and R46 554 in bond costs.

You must assess the additional expenses of purchasing a rental property before committing to something that you cannot afford, even with rental income. Other expenses may include furnishing the property and insurance.

• Liquidity

The ease with which an asset, or security, may be changed into immediate cash without impacting its market price is referred to as liquidity. If you need rapid access to your investment, real estate may be a risk for you. Selling a property is not a simple or quick process, and selling hastily or under pressure may result in a loss on your investment.

Real estate investing necessitates investors to purchase and hold for a longer period of time than most other types of investments, which may be an effective risk management strategy for those who have not experienced big financial returns from other types of investments.

• Property damage

One of the risks of investing in real estate is the vulnerability of your assets to destruction. Because it is a tangible asset, anything may happen to it at your expense, causing it to lose money. Natural disasters, fire, tenant damage, robbery, or vandalism are all potential threats.

Fortunately, protecting your investment from the inside out is both achievable and rather straightforward. Although you may never need to file a claim, home insurance or landlord's insurance is a sound investment. An insurance policy is simple to get and is a good way to manage the pitfalls of real estate investing.

• Unoccupancy 

Another risk of owning a rental property is the possibility of it being unoccupied for a lengthy period. You'll have to pay the bond without the extra money because you don't have any renters to pay the rent.

This can happen when there isn't enough rental demand in a certain location. To avoid this, do some research on the rental rates in the area you want to invest in before you start looking at houses. This will give you a decent indication of the likelihood of your investment property being rented.

Of course, finding acceptable renters might be difficult at times, but this is more of a timing factor than a lack of demand. You may avoid such situations by hiring a Knight Frank property consultant to assess and screen future tenants.

If you're looking for an investment home, contact Knight Frank today. We'll assist you in finding the ideal property and renters to meet all of your rental requirements.