It might shock some of you that a Real Estate agent is writing an article warning his potential clients of the pitfalls of investing in rental real estate. Well, don’t be shocked. I am more interested in ensuring that my clients succeed in their desire to invest in rental real estate, than just to get them to throw their money at a speculative endeavor. Before you invest in any security or business, you need to examine what can go wrong and find ways to avoid or mitigate the potential pitfalls.
Below are four pitfalls you may face investing in rental real estate
- Artificial Urgency: One of the benefits of being an investor is that you don’t really have to invest, unlike people buying for their personal use who have timing factors. As an investor, if anyone presents a deal to you and asks you that you have to decide right now or within a few days or hours, chances are you are being set up for a bad deal. There will always be great deals out there for the patient investor. Do not succumb to artificial urgency. Take your time and make a wise decision.
- Due Diligence: Ready, Aim, Fire…most investors do this backwards (Ready, Fire, Aim), they tend to purchase a property before thinking about how to rent it out, how much rent it will yield, what the taxes and maintenance will be etc. You need to calculate your Return On Investment (ROI) before going into any deal and be very conservative with your calculations. Make sure you use experts to conduct your market research, inspections, appraisals etc. before you close. Your due diligence must be completed before you close on a property not after.
- Turn-key Properties: For new investors, I would strongly recommend you stick with turn-key properties over a rehab project. Even though HGTV shows you how exciting it is to rehab a home or the late night TV informercial gurus tells you how much more you can make rehabbing properties, there is significant risks in undertaking a rehab project. Even with the most careful plans and due diligence, rehab projects seems to find mysterious ways of eroding your ROI with unexpected surprises. I always advise my new rehabbers that they should double their projected rehab costs and time, if the project is still profitable, then you can proceed and undertake it.
- Don’t get greedy: This is a very important pitfall that most new Real Estate investors fall victim to. Investors often go against the advice of the experts Real Estate agent that they have hired just because they want to squeeze another $50 out of their monthly rent. Take for instance a home that rents for $1500, and your Real Estate Agent advised you to put it on the market for $1500, but Mr. Investor has checked Zillow or just because they have put some high end appliances in the home, they insist on asking for $1550. Well, this could be difference in your rental property renting in a week or in 2 months.
The other aspect of being greedy is that a lot of new investors choose to manage their properties on their own just because they want to increase their ROI. DON’T DO IT. Imagine getting a call from a tenant on New Year’s eve that their stove is broken and you are on your own vacation. What would you do? Imagine having to evict a tenant, while you are busy with your own career. This is what leads to all the horrible stories you hear from jaded Real Estate Investors. Save yourself the hassle and get a professional property manager.
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Tarl Anderson Properties