Purchasing real estate with the intention to use the property for rental income is often a quality, long-term financial investment. Be aware that there is quite a bit more to renting a property than purchasing a home and finding a tenant to pay your mortgage for you, a lot more.
One of the most important steps a new landlord can take is to understand the type of property that they wish to invest in to benefit from such a large investment. There are many options available, from single- family home, apartments, condos, multi- family homes, etc. Knowing which type of property, you can afford to invest in is key.
Unfortunately, new investors often have very little experience or expertise when it comes to real estate, or the business of renting properties for profit and make some very serious mistakes.
We will discuss the some of the common mistakes new landlords make when purchasing properties for profit.
Location, Location, Location
One of the most important factors to consider when purchasing your investment property is its location. The location of the property is hands down one of the most crucial factors when selecting your property, as it can essentially make or break your cash flow and return on investment.
Consider purchasing a property that is located near high traffic employment areas. People tend to want properties that are located near their jobs to avoid commuting, and high gas costs.
Do your research of the surrounding areas. Areas that have shopping centers, high-end apartments, fine dining, exclusive retail stores, entertainment amenities can be a great place for investing.
Don’t pressure yourself to buy right away, no matter how great a deal may sound. Investigating your location beforehand will help yield the largest profit in the future.
Underestimating Repair Costs
When purchasing a property for rental income, it can be hard to estimate the cost of repairs that need to be done. Watch out for rentals that need a substantial amount of work before it will be “rent ready”. Sometimes great deals on properties are “too good to be true” and are hiding the fact that the property will need a lot of work and repairs. This can add a great deal of time and money to your budget. That means your property will be vacant longer, hitting your profit hard from the start as you lose the monthly income you would expect to receive while repairs are being completed.
Here are some great tips for dealing with repairs on your investment purchase:
- Invest in a quality and thorough inspection. An experienced person will know what things to look for and what questions to ask. You cannot rely on a simple walk through or your own knowledge of how you think things should look and function. Often there are underlying issues that aren’t always blatantly obvious during a walk through.
- Only use highly qualified contractors to do your repairs to avoid poor workmanship and overpaying for repairs and renovations.
- Always budget for the unexpected. Expect and prepare for unforeseen issues with your property and make it a part of your budget from the beginning. Doing this will ensure that you are prepared for anything that may come up with your new investment.
Overpaying on Renovations
Similar to underestimating cost repairs after your initial purchase, overpaying for upgrades is a common problem for many new landlords.
While it is important to make your property appealing to tenants and essential that the home is habitable, it is not wise to over-renovate.
Many new landlords want to create a dream home out of their rental properties.
The issue is, not only does that cost a lot of money, but the longer it takes you to renovate what is an already acceptable property (at least it should be if it was a wise investment), the longer it takes you to rent that property out. Don’t forget, sitting on a property is not making you any money. Don’t let emotions play a role in any decision making regarding your rental property, this isn’t your dream home, it is a business investment and should be treated as such.
Avoiding Negative Cash Flow
Excitement regarding purchasing a rental property is to be expected. But be careful to not let your excitement cloud your judgement with your investment. The last thing you want is to be in the negative right from the beginning. Here are some tips to avoid creating a negative cash flow with your rental property:
- Doing your homework in the neighborhood is key. Check the properties around the home you are wanting to purchase. If there are a lot of vacancies surrounding the home or in the area, you may want to avoid purchasing the home. Again, don’t let your excitement for a property keep you from making an educated and informed decision. Having too many vacancies hurts the value of your home and indicates that supply is up and demand is low. Instead, look for areas with high demand and low vacancy rates.
- If vacancies become an issue and you have already invested, remain flexible in your rent. It is far better to net less money than expected than to sit on a vacant rental for long periods of time.
- Do the math. After you have paid for the mortgage, taxes, insurance, and any maintenance required, you should still have money left over. If that is not the case, reconsider investing in that particular property.
- Check comparable properties to make sure you are not overpaying for your property. Falling in love with a home and the potential income that property may bring can easily cloud your judgment. Again, this is a business deal, not your dream home. Treat it as such.
One of the biggest mistakes new landlords tend to make is getting in way over their heads and taking on too much responsibility at once.
Tenants will not always pay on time, and maintenance issues will arise at all hours of the night, all of which many landlords cannot handle on their own. Consider whether or not you want to spend a ton of your time taking care of the property. The best solution to this problem is to seek out and invest in a quality property management company. They will be able to handle all of these responsibilities leaving you to reap the benefits of being a rental investor. They can handle everything from marketing, tenant screening and placement, maintenance, collecting and enforcing the rent, evicting a tenant if needed, and so much more. This will give you more time to spend doing the things you want to do and give you a peace of mind that everything regarding your property is being taken care of.