5 reasons not to buy an income property

Buying a second property for profit or leisure

Income properties can often be good investments but this does not mean that they are for everyone. Below we are going to look at some of the reasons why you might want to avoid investing in an income property.

Low liquidity

An income property is an investment that can be hard to liquidate quickly if you need money. Many other investments such as stocks and options are traded on an open market and can be sold at any time. Most stocks can be sold at market value in a matter of seconds. Some less traded stocks can take a little longer but almost all stocks can be sold during one trading day. This is not the case with an income property. You can but your income property on the market at any time but it will take weeks or even months for it to sell and the funds to clear. Selling a property quickly can result in large losses. You often have to sell below market value if you want to sell as fast as possible.

Regulatory restrictions

There are a lot of rules and regulations you need to comply with if you want to let a income property. This is especially true if you want to create several units in one house. There are rules regarding fire safety, ventilation, minimum window size and a lot of other things. Knowing about and conforming with all these rules can be hard. It can also be expensive to make sure that a property you bought complies with all these restrictions.

These regulations are something you will need to know and work within if you want to invest in income properties. Doing so does not have to be hard once you have learned all the rules but can make turning your first property into an income property a taunting task.

Requires continuous work

Income properties are not passive investments. They might seem like they are. You renovate them and then you collect rent but the truth is that they will require continuous maintenance work and you will need to be available to fix any problem that arise in the unit. You need to be available or have someone who is available to fix water leaks, electrical problems and other issues that might arise. This type of issues should be rare if you kept your properties in good condition but you need to be available if they do happens. This makes it harder to plan vacations and other trips since you need to have some one that can fix things while you are gone.

You can not hire a property manager to do this. Doing so will eat all your profit (and more). You need to have at-least 10 properties or more before that become an option. I personally recommend that you have 25 units before considering hiring someone to take care of the properties for you.

Bad tenants

Bad tenants can be a real problems if you own an income property and bad tenants can cause you to lose out on profits or even lose money on your property.

There are 3 basic types of bad tenants:

  • The ones that cause a disturbance for the neighbours. These tenants does not hurt your profit but needs to be dealt with to keep good relations with your neighbours and avoid civic complaints.
  • Tenants that do not pay their rent on time / at all. A tenant that do not always pay their rent on time do not have to be a problems as long as they do pay their rent and provided that they are otherwise good tenants. A tenant can be a good tenant even if they pay their rent a little late.

    Tenants that are very late with the rent or do not pay them at all are very bad tenants and cost you money. You should try to remove them from your property at soon as possible. Do not allow them to stay without paying. The longer they are in the unit the bigger the risk that they will damage it.

  • Tenants that damage / destroys the property. This type of the tenant is the worst of all because they can cost you a lot of money. A tenant that do a lot of damage to you property can force you to spend tens of thousands to restore it to rent-able condition. You need to to do all you can to avoid renting your income property to this type of tenant.

Easy to fail

It can be easy to make money investing in income properties. It is also easy to fail. If you fail then you can lose a lot of money.

The most common reason that people fail when they try to invest in income properties is that they fail to do the research needed before they buy their first property. The research you do before you buy your house and the house you chose to buy are the two most important factors of success or failure. Buying the wrong house at the wrong house will cause you to fail.

There are a number of mistakes you can do even if you buy the right house.