When the real estate market is as hot as its been over the past decade, it’s easy to get caught up in thinking rental property investing is a guaranteed cash cow. But while it can be a prosperous method of generating income, it can also lead to dire financial consequences for those who are ill-prepared for the challenge.
Rental property investing comes with a lot of risk. When you sign your name on a real estate transaction and accept payment from someone to live in a property you own, there’s a lot on the line – financially, legally, personally, and professionally. If you aren’t careful, you can really screw it up.
Here’s a recipe for doing just that (as well as advice on how to take an alternative path):
When the seller is a nice, down-to-earth individual, it’s tempting to accept everything he says as truth. But even if 90 percent of what he says is true, there’s always a chance that there are some details being omitted, exaggerated, or misconstrued. Taking a seller at his word is a recipe for getting taken advantage of.
It’s okay to be cordial and cooperate with a seller, but always do your due diligence when buying a piece of real estate. A failure to dig in and verify claims through titles searches, property inspections, and basic online research is a huge mistake. It will eventually come back to bite you.
Getting emotionally invested in a piece of real estate is one of the biggest mistakes when investing. The moment your emotions take over is the moment you cease to make logical decisions. Gut feeling and instinct might have a small place in investing, but be wary of giving your feelings too much say. If there isn’t data to back up a decision, it’s nothing more than an opinion.
“There is so much information that can be analyzed: market data, neighborhood data, demographic data, trends, property data, cash flow, rental projections, etc. This is data that can accurately predict trends for you,” investor Julien Leclair-Dionne writes. “Think intuitive right brain versus logical, analytical left brain: Neither side is better. Balance it out and get the best of both worlds. Use data to stay grounded. It can help you ensure that you are making a good investment.”
When the swelling real estate bubble finally popped in 2007, a lot of people finally realized just how risky their investments were. Today, we’re in the middle of a decade of unprecedented real estate growth and lenders are getting lax with their financing. Let this serve as a warning: Just because someone offers you money doesn’t mean you should take it.
Bad financing comes in all shapes and sizes. From horrible interest rates to rigid terms to extremely low down payments to unrealistic payback terms, there’s so much that can go wrong. Step back and view financing objectively. If you wouldn’t advise a friend or loved one to do it, don’t do it yourself.
Running cash flow projections might be time consuming, but it’s one of the most important steps in the process of buying an income producing property. The biggest mistake rookie investors make is failing to use realistic numbers.
When running cash flow numbers, be ultra conservative. Account for more vacancy than you expect. Use baseline rental figures. Build in maintenance and repair costs. If the numbers don’t work, look for another deal.
You’re only one person. No matter how smart, experienced, or wealthy you may be, you can’t run a thriving real estate investing business completely on your own. Isolating yourself will ultimately lead to costly mistakes and blind spots in your strategy.
You might not need an investment partner, but there’s something to be said for having at least one of the following: real estate agent, insurance agent, property manager, CPA, and/or handyman.
In most cases, renters have lower expectations than buyers. (This changes when you’re renting luxury real estate, but it’s a safe rule of thumb for the rest of the market.) They won’t accept poor living conditions – and you certainly shouldn’t provide bad housing – but there’s no need to overspend on upgrades.
While upgrades might enhance the value of the property when it comes time to sell, you won’t recoup a ton of value from renters. You’re better off using this money in another capacity.
Lease agreements are more than formalities. In situations where tenants don’t live up to their end of the bargain, a bulletproof agreement can provide financial and legal protection. Writing a vague, single-page agreement puts you at risk.
Include as much detail as you can in your agreement. It’s also important to have an attorney look it over.
Getting a tenant to fill out a lease application is exciting. In some cases, it brings a huge sigh of relief. However, don’t make the mistake of accepting anyone and everyone who fill out an application. Do your due diligence, verify income, and contact past landlords. This will save you from letting bad tenants into your properties.
Rental property investing isn’t for the faint of heart. It requires time, skill, money, and a willingness to take on a certain degree of risk. However, anyone who is willing to learn how to invest in real estate can do it.
One of the most important aspects of rental property investing is surrounding yourself with the right people, mentors, and business partners. At Green Residential, we’ve helped hundreds of Houston-area property owners manage their investments with comprehensive property management services. If you’re interested in learning more about how we can partner with you, please contact us today!
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