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Investing in Single Family Homes - What Could Go Wrong? [by Harold Willig]

Have you ever thought about dabbling in real estate investing, particularly single- family rental homes -- but it's not easy to do, and the risks are real. We love investing in single-family homes, but we’d like to share a few of the risks:

Capital Risk

First, let’s say you buy a home, rehab it, rent it, manage it for several years, and sell it for much more than you bought it. That doesn't necessarily mean you made a profit. Why? Your expenses - rehab costs, management fees, mortgage interest payments, property taxes, and insurance premiums - and your unexpected costs – mold remediation, plumbing, and roof repairs – will eat income. These unexpected costs can turn positive cash flow into negative cash flow. Also: property taxes can go up, home values could go down, and nosy or noisy neighbors could move next door.

Vacancy Risk

An empty home pays no rent. You will also have repainting, re-carpeting, and other re-dos to get the property rent-ready again. And if the tenant left a mess, it may cost dearly to get the unit turned around.

Concentration Risk

When you buy an investment property, you are probably putting a lot of your capital into one investment. This is a called “concentrated risk." You may have less to spend on other investments with a lower investment dollar threshold.

Institutional Investor Competition

Big investors, like the Blackstone Group, American Homes 4 Rent, Colony American Homes, and Fundamental REO, may have easy and swift access to capital, and the potential power to impact rental and sale prices. Nearly 20% of all single-family homes in 2015 were purchased by institutional investors as an investment, rather than as a primary residence. According to the National Real Estate Investor, “Non-occupant buyers—any buyer who purchases a home but has their property tax bill mailed somewhere else—bought 36.8% of the homes sold in the first quarter of 2015. That’s a larger share than any other period since the first quarter of 2011.”

Liquidity Risk

Keep in mind that your investment isn’t particularly liquid. You can’t cash out the same day like a stock, bond, ETF or mutual fund. The average time on the market for a single-family home nationwide June 2016 was 34 days, according to the National Association of Realtors.

Management Risk

If you’re investing in a property out of state, and hire an ineffective manager, you’ll need to find a new one. That takes time and money.

Opportunity Cost

Should you keep your day job? Many successful real estate investors tend to treat buying and managing single-family homes as a second job. The amount of time you spend on your real estate investments may come at the cost of less time and focus on your full-time career.

For more information on why your should consider investing in a professionally managed portfolio of single-family homes, please contact Harold Willig at 917-209-4452.

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