Investing always has some risks to it so the more you know about your investments and their risks, the less likely you are to be trapped in a tricky situation. Multifamily investment can give you a great return if it is managed properly but you need to be aware of the possible risks when it comes to investing. Let’s explore some of the regulatory risks that can come with owning multifamily property.
1) Look at your local laws first
It can be hard to decipher what the laws for landlords and the laws for tenants mean for your investment so ask a real estate investment professional to help you figure out what they mean in simpler terms. Some states have very complex laws in place that change often so if you want the best return for your investment, look for places that have flexible laws with minimal current legislation to change them.
Smaller towns and counties are more likely to have local laws that work to benefit everyone while larger cities are likely to have laws that lean more towards the tenant’s favor. This is usually based on a housing issue that the city has developed and while investments might be initially low, your return likely won’t be very high and it might involve more red tape than you want.
2) Consider what will be affected
There are so many different ways laws, bylaws, and regulations can change that might end up souring your great investment. An example would be a rental increase freeze, an eviction moratorium, or a law that involves who you can accept as tenants. Have a look at one way your investment can turn bad within a few years.
Let’s say that you own a building of 4 inclusive units that is giving you a profit of $2000 a month but the energy costs are suddenly increasing for your area which brings your profit down to $1000. Unfortunately, new laws have come into place in your state and you can’t increase the rent to account for the new costs plus you’re not able to sell without transferring the current lease agreement. With the energy costs increasing, it will be hard for you to find a buyer that is willing to accept such a small profit, and your great investment has now turned into something that might end up costing you money.
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3) Keep up with the changes
Paying attention to potential changes in your local property regulations is the best way to make sure you can keep ahead of any risks that come up with your investment. This means paying attention to state and city laws that might hurt your real estate investment. It’s a good idea to make some friends and connections in the community so you can establish yourself as a trustworthy and well-meaning landlord.
4) Be prepared for the unexpected
Sometimes you can make friends with the local lawmakers and stay as ahead as possible with any new bylaws that might affect your property ownership but sometimes you can’t. The pandemic threw a wrench into many landlords’ plans and there were plenty of people who were unprepared for the majority of their renters to be without work all at once. With more regulations that came into place involving a hold on evictions, some investors were left in the dust when it came to profits from their properties.
It’s a good idea to put aside one or two months’ profit from each of your properties and use that for emergencies. This will allow you to have a few months to figure out what you want to do if you end up in a situation where a new law has drastically changed your profit.
There are so many things that can suddenly change and if you want to keep your investments safe, you need to be well aware of multifamily property management tenchniques.
5) Know when to hold them and when to fold them
Real estate property investment can be a fantastic way for you to make some quick money and build up your capital but you need to know when it’s time to back out. You have to abide by local and state laws in order to be successful and if you think your property is about to be affected and you won’t be able to handle it financially, you should think about selling it as soon as you can.
Imagine if your city put a new regulation in place that required your building to upgrade its electrical system for safety reasons. The profit on the building is usually $2000 and the cost to replace the system is going to be around $20,000. For a small investor, going without profits for 10 months isn’t ideal but a larger investor can cover the repair cost easily and abide by the laws with no issues so selling the building is the best idea.
Understanding the risks in investing in real estate is the only way to make sure you avoid situations that could cost you money. Keeping up with the regulations and making sure that you’re safe if there are changes will give you confidence that your investment will be able to handle any issues.
