When you decide to buy an investment property, you choose to become a business owner. And making a profit is one of the most important aspects of running a successful business.
However, as a new real estate investor, you’re bound to make mistakes. The key is to limit the effects of your mistakes so they don’t cut into your profits each month.
To help, we’re going to walk you through five common mistakes landlords make that end up reducing the profitability of their investment.
Investing in a Bad Location
Most people have heard the phrase “location, location, location” when talking about real estate. It’s especially true when it comes to investing. One of the biggest reasons a potential tenant will choose your home is because of where it’s located.
Is the neighborhood desirable? Are there bars and restaurants within walking distance? Are the schools good? These are things people consider when picking a home. That means they’re things you should consider before buying property as an investment.
If you live in the city where you’re investing, you probably know about different neighborhoods. However, if you’re investing from a distance, it’s a good idea to have a good real estate agent who understands neighborhoods and knows where people want to live. If you purchase a property that looks great on paper, but no one wants to live there, it’s going to kill your profitability.
Misunderstanding the Numbers
When you purchase an investment property, you want to make money on the purchase. So it’s important to make sure the numbers work. The last thing you want is overpay for a property and have it require a lot of work.
Inaccurately predicting expenses is one of the most common mistakes first-time investors make. Doing this can easily lead to slim margins.
While it’s simple to know your mortgage payment, insurance and property management fees, it’s important to be conservative when estimating how much you’ll need to set aside in a maintenance account for current and future repairs. And like a car, the older the house, the more work it might need.
After you have a good understanding of how much the property is going to cost each month, you’ll need to look at how much income you’ll be able to generate. The 1% rule is common in real estate investing. It calls for investors to look for properties capable of generating rent that is 1% of the home’s purchase price. That means that if you purchase a home for $150,000, you should be able to receive $1,500 per month in rent.
Failing to Properly Screen Tenants
When you own a rental property, it’s critical to get tenants into it quickly. Once a tenant informs you of plans to leave at the end of the lease, it’s important that you then list the property for rent. Failure to do so can leave a gap between tenants, and that reduces your profits.
But the last thing you want to do is to accept tenants just because they say they’re willing to pay the rent. It’s important to do a thorough background check, otherwise, you risk a number of things going wrong. The tenant might be notoriously late with rent or might not care for the property, which can lead to higher maintenance costs for you. And when it comes time to move out, the tenant could leave the home in less-than-ideal condition.
Properly screening tenants is critical. Without a solid process, you could end up losing thousands of dollars in profits.
Choosing the Wrong Upgrades
Your rental property needs to look good if you want to attract tenants, but when making upgrades, choose things that won’t cost a lot when they need to be replaced.
One example is flooring. Carpet might be soft on your feet, but it can wear out and stain easily. That could lead to it needing to be replaced each time a tenant moves out. Consider using an engineered hardwood instead. The cost is similar, but the longevity is much greater.
Also, keep high-end finishes out of your investment property. If you have to replace a faucet or an appliance, use one that’s at a lower price point but still looks good.
Putting Money Aside for Maintenance
Setting aside money each month to cover any current or future repairs is one of the most important things you can do as a property owner. The money can be for something as simple as yearly maintenance on the HVAC system or a new water heater.
By having money available when needed, you are more likely to take care of problems when they pop up instead of when they become an emergency. This will save you a lot of money.
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