The rental property remains one of the best investments available. It’s a powerful wealth building tool that has made millions of individuals millionaires. However, if you’re not careful, rental property can be an expense instead of an investment.
To help you out, here are top 10 common mistakes to avoid in rental property investing.
Failing to do your homework
Though you don’t need to be an expert in real estate investments, doing your homework is necessary. Begin by about the area you wish to invest in.
Check all the historical values, amenities and vacancy rates of properties in the neighborhood. Talk to the locals, real estate agents and property managers.
Overpaying on renovations
For many landlords, overpaying for upgrades is a common problem. Although it’s essential to make your rental property as attractive to tenants as possible, it’s a bad idea to do it excessively.
Choose renovations that have the highest return on your time and money. Avoid major renovations that could take a longer time to complete especially if the rental property is already in an acceptable condition.
Not buying positive cash flow property
A healthy cash flow is necessary for a business to survive. Positive cash flow properties are profitable. With a positive cash flow, you are able to ensure timely payments to your creditors which will also have a positive effect on your credit rating.
Here are a couple of ways to avoid creating negative cash flow with your rental property:
- Check comparable properties to ensure you aren’t overpaying for your property.
- Do your calculations. After paying for expenses such as insurance, taxes, maintenance, mortgage among others, you should still have money left over. If you don’t, walk away.
- Suppose you’ve already invested and vacancies have become an issue, be flexible in terms of the rental price. Vacant rentals can be costly.
- Invest in areas with high demand and low vacancy rates. Sounds obvious, but it’s often overlooked. Avoid investing in a property surrounded by other rental properties.
Choosing the wrong location
Location is one of the most important factors when it comes to rental property investing. It could spell the difference between success and failure. Choose the right location and you’ll get the easiest and highest financial rewards. Choose the wrong location and you risk throwing money down the drain.
The location shouldn’t not only be appealing to potential tenants but it should also be in an area that you feel comfortable traveling to from time to time.
Underestimating repair costs
Avoid rentals that need a lot of work before they become “rent ready.” Also, be wary of “great deals,” because this might be used to mask the fact that they need a lot of work done before they are ready to rent out.
To avoid this, always invest in a thorough inspection. And to avoid shoddy repair jobs, only use highly qualified contractors. Experts also recommend adding an additional fifteen percent to your estimated repair costs.
Saving by self-managing
Not having a property management company can be a big mistake. Yes, they cost some money, but these are experts who are knowledgeable in all areas of property management. That is all they do.
As per , “Working with a property management company will allow you to save money in the long run. When you work with a property management company you’ll receive discounts on maintenance and repairs due to their established relationships with vendors. You’ll also avoid making errors that can result in legal issues.”
If they are a quality company, they’ll be able to handle all of these responsibilities leaving you to enjoy your profits and free time.
Buying too many properties
Avoid buying too many properties if you are a novice investor. Start small to get a feel for the rental property investing business. Experts even recommend waiting a minimum of one year before buying any additional properties.
Failing to buy the right insurance
Failing to buy the right insurance that is tailored to your needs is a common mistake that many first-time property investors make. The right insurance can make sure your investment is protected against inclement weather conditions.
Missing items in contracts
Always read the fine print carefully when purchasing rental property. It’s recommended that you hire a lawyer. A missing item can be costly to fix. A lawyer will not only save you time but will also ensure the contract has all the necessary clauses.
Thinking the property will always be rented
If you’re taking a loan, do your financial due diligence first to avoid financial ruin and foreclosures. This is why it’s important to do a thorough cash flow analysis of the property you intend to buy.
Rental property investing is without a doubt a great business. That being said, it’s imperative to avoid common pitfalls so as to avoid making unnecessary financial loses.