Originally Posted by
interceptorpilo
Sounds really good. Wish I had done this. But there are some downfalls not discussed- what happens when there is a downturn and your renters can’t pay the rent?
-It depends on the property, renter, lease and jurisdiction. Some asset classes do better than others in a downturn.
You evict them right?
-If it's a storage unit, I forclose and have an auction. -If it's RV storage, I sieze the vehicle, notify lienholders and auction the vehicle if I'm not paid.
-In an RV park, remedies are as complicated as eviction to something as simple as removal for criminal trespass.
-Residential tenant gets a notice to vacate, sometimes in as little as 3 days depending on the jurisdiction, lease and financing terms.
-Cash for keys is an option if the property is left in good condition.
-A commercial tenant is handled per the terms of the lease. I've had late pays, but never an eviction. I've also collected every penny of late fees in those cases. My worst case was a commercial tenant whose damages exceeded the deposit. I ended up eating less than a month of rent.
Even landlord friendly states/counties can turn against investors. Free flowing COVID rent was great til it wasnt. There are certain markets I avoid because of the judge, but generally mitigate the risk with asset class vs jurisdiction. The risks you present are very real and deserve planning.
The first step in reducing risk for houses/apartments is proper education. Next is tenant screening. Then collecting an appropriate deposit based on risk. Finally you can offer an insurance in lieu of deposit program as a method of security.
Most states that takes at least two months. So you are out those two months rent. Then you have to rehab the property and get new renters - another month at least. Then in a downturn you likely have to lower the rent. Will that now cover you expenses? Maybe. What if this happens on multiple properties at once? Multiple mortgages being paid with no income plus the renovation costs. I have managed properties before and seen this so yes very possible even likely in a downturn.
Maintaining proper reserves is a must. If you are operating so close to the margins that a rehab and a few months of lost rent puts you out of business, the problem wasn't with tenants or the market. The failure was with capital allocation. Concentration in a market is great until it isn't. Having a mix of tenants and properties can reduce the risk of concentration. It's unavoidable in the beginning with only a few tenants. In my case, any time one area of the portfolio represented too much concentration, I grew elsewhere.
I left residential real estate in 2015 and made a few mistakes when returning in 2019. The biggest two mistakes were geographic concentration and too much interest rate risk.
Even with rate cap insurance, variable rate debt can wipe out cash flow and equity faster than most people realize. In hindsight I would have gone lighter into MF turnarounds with bridge loans (Capital gains play) and heavier into long term holds with fixed rate debt (yield play).
The good news is that inflation fixes most problems if you don't screw up the leverage. The best way to not screw up leverage is to consistently grow your portfolio. If you have a meaningful portion of your net worth that you want allocated to RE, do it over a few years, not a few months. This is chess, not checkers.