The life of a residential landlord isn’t for everyone. While the thought of appreciating property values and rental income is enticing, you’ll also face the prospect of receiving calls about broken pipes at 3 a.m. and scheduling routine maintenance as a cost of investment. Even hiring a management company to handle day-to-day issues won’t spare you from the hassles of owning rental properties. You’ll make your life as a landlord a lot easier if you avoid common mistakes many first-time real estate investors make when they purchase their properties.
Confusing Cheap Properties with a Good Business Opportunity
It’s tempting to scan real estate listings and target low-cost homes as potential rental properties. But snatching up a home simply because of its price tag can be a recipe for disaster. Many renters avoid properties in undesirable neighborhoods or bad school districts. It’s also more difficult to rent the ugly-duckling home, even if it’s in a desirable location and has been well maintained. Treat residential properties as you would any other business. Develop a plan based on your ability to rent the property, then purchase a home that fits the plan. If you snatch up a home simply because it seems like a bargain, you might discover it’s difficult to rent.
Skipping the Inspection Process
You’re probably not so naive that you’d purchase a home without sending an inspector to comb it over. But sitting back and sending an inspector to a property unaccompanied is almost as foolhardy. A property inspection gives you the go-ahead to raise any and all concerns about the property’s condition and its fitness. Raising questions to the inspector doesn’t make you a nag, and it might just lower the price of the home. A few questions about issues such as hairline cracks in shower grout, makeshift repairs made by homeowners instead of professionals, or flaking paint on trim can call the inspector’s attention to small details and ultimately shave thousands of dollars off the purchase price.
Overlooking Improvement Costs
Purchasing a fixer-upper might save you some cash on the real estate deal, but don’t underestimate the amount of money you’ll need to get the property whipped back into shape to make it enticing to renters. Don’t stop at estimates for contractors to patch up the bathroom or pull that nasty shag carpet out of the bedroom. You also must budget for lost rental income as the place is being rehabbed. As anyone who’s ever dealt with contractors will tell you, improvements almost always take longer and cost more than you estimate. To be on the safe side, budget for twice the cost of improvements when you weigh the investment.
Underestimating Ongoing Costs
Many investors attempt to purchase properties that generate about 1 percent of their purchase price each month in rent income, according to the Wall Street Journal. While this paints a picture of a 12 percent annual return, few investors' bottom-line returns are that rosy. Routine maintenance, repairs, taxes, advertising and other administrative costs all chip away at that return and can drastically reduce your earnings. You must also factor in expenses that catch you by surprise, such as air conditioners that stop working or renters who stop paying. It’s not uncommon for rental properties to gross about 5 percent or 6 percent returns after you handle expenses.
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