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Real Estate Rental Income – Don’t Rush | International Residential Real Estate Investors Association
Wednesday January 24th 2018

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Real Estate Rental Income – Don’t Rush

We all want to create wealth faster. Additionally, we are tempted to rush to big gains. The recent recession, the housing crisis, etc. all show how risky this can be. Let’s consider that a developed economy grows between 2.5% and 3.5% during good times. Think about the fact that a good stock grows 8% to 13% to year in a mature industry. These numbers consequently show that significant risk exists in pursuing significantly greater performance.

In the case of our residential real estate investing plans, reducing risk is perhaps the best way to assure winning performance. This perhaps implies we are better off to pursue a smaller surer gain with fewer risk traps.

With a pattern of risk averse processes in place, investors can achieve the best gains by then focusing on increasing their low risk transactions. Using the power of leverage limited to reduce risk exposure is a sound business practice.

What constitutes a low risk investment?

The major items are:

  1. High  debt service coverage is a great starting point.  This implies you can overcome significant changes in ongoing expenses or losses in income.
  2. Strong reserves are critical.  Hold reserves needed to cover all debt and expenses for 3 months or more for a multi unit project.  For a single unit investment 6 months is advisable if you don’t have a pooled reserve to protect several properties.
  3. Loan terms and amounts that avoid or nearly completely avoid default risk through changes in the  loan to value ratio or occupancy.
  4. Include investors (if you have any) with strong liquidity should all of the above fall through.

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