The success of your rental operation requires you to have knowledge and expertise, just as any form of investment. The best way to secure your success is to be meticulous and well-informed. However, as with any form of investment, residential property investment comes with risks. As a landlord, you need to be aware of the risks in order to be able to avoid them with appropriate preventive measures.
There are four risk categories that are commonly associated with investing in residential property: tenant selection and lease agreement, the property itself, interest rates, and political factors. Their impact on your investment varies by the choices you have made and the goals you have set, so the risks should be assessed specifically from the perspective of your investment. The most important thing is to be aware of the risks and to assess their impact on your investment.
Risks involved with tenant selection and lease agreement
A solid tenant selection is probably the most significant prerequisite for a good lease. One landlord might prefer retirees, another students, and a third families. Naturally, no single ’correct’ alternative exists. What you should always do is check the financial standing and the credit information of the prospective tenant.
Another very important prerequisite for an investor is to create a proper lease agreement. We recommend our agreement templates (in Finnis) as they include all essential provisions. Also, remember to set the rent at a proper level in order to avoid unnecessarily high tenant turnover.
If the landlord fails in the above, risks include e.g. neglected rent payments, damages to the apartment, and ’empty’ months with no tenant. At worst, such issues may turn your profit negative.
Risks involved with the apartment itself
As a landlord, you should be aware of any planned renovations and the general increase in maintenance costs. Particularly important are e.g. major plumbing and facade related renovations which can lower your rental profit quite significantly. What’s more, you need to renovate the surfaces from time to time. In addition to planned repairs, you may be faced with water damage as a pipe breaks down in the building. The housing company is naturally liable for the repairs, but your apartment may be in uninhabitable living condition for long period of time. To cover for the rental income suspensions any unsuspected and sudden damages may cause, you can get a landlord insurance.
Location also comes with risks. An area may either improve or deteriorate over time with urban planning measures and fluctuation of services and jobs. Currently vital city centers may become victims of a population decline which decreases the value of apartments in the area. There are always risks involved in the valuation of property.
Risks involved with interest rates
With appropriate use of leveraging, you may boost your profits quite considerably. However, this always comes with risks. An increase in interest rates may affect your investment significantly if you use substantial leveraging. The bigger the leverage ratio, the higher the risk with interest rates. The most important thing to do with leveraging is to calculate your risk tolerance.
Risks involved with political factors
Any investment also comes with some political risks. First, taxes may always increase and various forms of investment may come to have higher taxation than others. Second, new legislative measures may provide help to some investors or make investing a more difficult proposition. The Finnish Landlord Association always strives to maintain and improve conditions for residential property investment.