6 Mistakes To Avoid When Buying Your First Rental Property
Dear Rich Lifer,
Beginner property investors are bound to make a few mistakes at first.
Obsessing over cash flow and forgoing other important details of a good investment deal, or overestimating how much management and repairs will end up costing are just some common rookie errors.
While cash-flowing properties are great, you shouldn’t forget that the capital growth of your properties will also contribute to getting you out of the rat race.
If you want to make sure you don’t fall into the same traps as other first-time landlords, pay close attention to these six common mistakes we’re about to reveal…
Mistake #1 – One-Dimensional Financing
You probably bought your first house through a traditional mortgage. While this can work for your first few rental properties, it’s a one-dimensional way of thinking about financing.
Experienced real estate investors view financing like a toolbox. And different properties call for different tools of financing.
For example, turnkey properties are good for portfolio loans kept in-house by the lender instead of being sold to the open market. Several portfolio lenders offer discounted interest rates and fees to experienced investors.
Comparatively, traditional mortgage lenders limit the number of mortgages one investor can have on their credit report. Most often you’re capped at four mortgages.
Other financing worth considering is private financing from family and friends and hard money loans. Get to know the different types of financing at your disposal and start networking with lenders in each category.
Mistake #2 – Overestimating Cash Flow
Like we said, cash flow is not the be all and end all for rental properties. It really does depend on your overall investment strategy.
But there is a tendency for new investors to overestimate their rental property returns by underestimating expenses.
If you ignore numbers like vacancy rate, repairs, maintenance, and property management, you’re doomed to fail. This often is the case for investors buying “turnkey” properties.
Just because you can start generating cash flow immediately, doesn’t change the fact that the furnace is still 30 years old.
Also, don’t get caught dreaming about rents. Too often, new investors use best-case scenario rents in their calculations instead of worst-case rents. Talk to realtors and property managers in the area you’re considering buying to get the scoop on true market rent and vacancy rates.
Mistake #3 – Buying the Next Hot Spot
You’ve heard people say location, location, location. Listen to these people.
Eighty percent of your property’s performance depends on its location.
Too many beginning investors try to find the next hot spot instead of investing in what has worked for the last 50 years.
The long-term growth prospects of your property require multiple growth drivers and these are typically found in inner suburbs of major cities, where residents have high disposable income.
You want to look in areas where buyers can afford properties that are gentrifying. Obviously these aren’t the only places to look but if you’re just starting out, avoid the temptation to try and reinvent the wheel.
Mistake #4 – Paying Too Much
This may sound like a no-brainer, but buyers overpay for properties all the time. The main reason why is they simply don’t do enough research.
You should know the neighborhood you’re investing in inside and out. How much did the house beside the one you’re thinking about buying sell for? What is the average market rent in that area? You should have accurate estimates on due diligence items, like appraisals, home inspections, and repairs needed.
Especially if you’re buying a rental property for positive cash flow, you need to get the price right at the start. Paying too much for a property can cripple your returns.
Mistake #5 – Not Screening Tenants
Whether the tenant is new or old, you should vet them. If you’re buying a turnkey property with an existing tenant, make sure you screen the tenant before you close the deal.
There are many horror stories of landlords who rent out their property to a deadbeat willing to pay above market rent, just so they can jack up the asking price of the house when selling.
If you’re the unsuspecting buyer, and you don’t catch this by screening the tenant, you may have a tenant defaulting on their rent and leaving you with a vacant property.
Always ask to see the original tenant screening reports, including credit, criminal, and eviction history. If the seller won’t release them, consider it a red flag.
Also, ask to do your own inspection of the property, with minimal notice given to the tenants. You want to see how they keep the property on an average day, not after cleaning up for your visit.
Mistake #6 – Keeping Bad Records
The last mistake newbie investors make is they don’t have their records in order. Even if your property is just passive income, you should treat it like a business.
Make sure all your records are organized, keep track of expenses, rental payments, repairs and maintenance, and save all receipts. You also need to save copies of any communication you have with tenants.
These include emails, texts, phone calls — jot down on a piece of paper what you talked about and include the date. Make sure you have records of the lease, addendums, and inventory forms.
Running your investment property like a business will save you a ton of headaches when a legal matter inevitably arises.
Owning investment properties can be a lucrative endeavour if done correctly. There’s no substitute for experience, so you’ll have to learn by doing. Just keep these missteps in mind as you navigate your first few deals.
To a richer life,
The Rich Life Roadmap Team