Investing in real estate is a great way to start gaining more assets and generating more income. Over time, it’s possible for real estate investments to generate enough income to replace a traditional job. In order to do this, however, those investments need protecting. Fortunately, there are multiple things you can do to protect your real estate investments.
Buy Adequate Insurance Coverage
Whether it’s a house, boat, car, or business, one of the first things people think about when looking for ways to protect belongings or entities is purchasing insurance. Insurance can mean the difference between surviving a disaster or lawsuit and becoming financially ruined. Of course, for insurance to be effective, it needs to be the right insurance for the job. If you’re a landlord, you need landlord insurance. If you own commercial properties, you probably need business insurance. If you’re covering your place of residence, you need homeowners insurance. You also might find that liability insurance and an umbrella insurance policy are also worth purchasing, depending on your investment portfolio.
Don’t Over Leverage
It’s important to avoid overextending yourself and your wallet when investing in real estate. Real estate is far from a get rich quick scheme. It takes time and patience to build up a portfolio. One of the things you can do to ensure that your investments are actually investments is to apply the 1% rule when selecting properties. This rule can be useful to determine whether a property is likely to break even or generate a profit. You multiply the purchase price of the property by 1%. The result is what you would generally expect to charge for rent each month. If that dollar value is greater than the cost of the mortgage and operating costs, you can expect a profit on that property. Of course, you also need to make sure that the rent amount makes sense for the area and condition of the property. If those benchmarks aren’t met, the property does not pass the 1% rule, and you should probably pass on it.
The condition of a property is one of the driving factors in how much it’s worth and what you can expect to earn from it. To keep a property in good condition, it needs to be regularly repaired and maintained. Since you can’t fix a problem you don’t know about, it’s important to have inspections done regularly. Start by choosing a good inspector. You’ll need to alert any current tenants of the inspection so they can make any necessary preparations. It’s also wise for you to be present during the inspection so you have firsthand knowledge of how the inspection goes and any problems that are discovered during it.
Maintain Your Properties
Once problems are brought to your attention, whether they are discovered by the regular inspection or your tenants, it’s important to fix them. Regular maintenance and repairs are what keeps small problems from turning into big ones that come with even bigger price tags. Have regular maintenance done on exterior portions such as the roof and foundation. There are many issues that can arise if your roof fails. The same can be said of foundations. Performing regular maintenance on these areas can prevent those issues from arising and needing to be fixed. Similar attention should be given to a property’s plumbing, electrical, and HVAC systems. These will help ensure the comfort and safety of your tenants and property.
Get a Home Warranty
Even the best, most regular of maintenance isn’t always enough to prevent damage and dysfunction of appliances and systems. And unfortunately, insurance may not cover everything. Fortunately, home warranties cover a lot of what insurance doesn’t. You’ll likely have to pay service fees in addition to the cost of the warranty, but if you end up needing appliances or systems repaired or replaced, you’ll likely find that the cost is well worth what you end up saving. Like insurance policies and other agreements, it’s important to carefully read the policy and understand what it does and doesn’t cover. Not all warranties will cover the same things and there may be terms and conditions you need to follow to prevent voiding it.
Choose Tenants Wisely
Chances are that you’re renting out your real estate investment properties. Unless you’re renting out your primary residence as well, you probably aren’t the one spending a majority of the time there. It’s important to choose good tenants who will take good care of your property and follow the guidelines set out in the lease or rental agreement. Keep in mind that there are things you aren’t allowed to discriminate against as a landlord. However, if you ask the proper questions on the application and investigate your prospective tenants, you’re likely to find ones that will be a good fit for your property.
Minimize Your Risks
As with most ventures, it pays to use common sense. Taking unnecessary or high level risks is probably unwise. Investing can be a risky business to begin with. There’s no need to add to the risk rashly. Carefully vet anyone you decide to partner with. You have complete control over what you do and the decisions you make, but throwing another person into the mix cuts the amount of control you have in half. Always do your research before you make decisions. Read everything and make sure you understand it before signing. And do your best to follow good, ethical business practices.
Form an LLC
If you have multiple real estate investment properties, it’s important to protect them individually from problems that may arise. Forming an LLC for each of them is a good way to do this. By creating an individual LLC for each property, you ensure that if one property is facing a lawsuit, the other properties can’t be included in the lawsuit, as they are separate business entities. This also means that your investment property is a separate entity from you as the owner, so your personal assets are protected as well.
It’s important to protect your real estate properties and investments, and there are multiple things you should do to protect them. This can help ensure that your properties are an asset instead of a liability, earning you income that can promote your personal financial freedom.
Check out our listings to find your next investment property! We have lots of great properties to choose from.