On the surface, real estate investing seems so easy. Passive income, property appreciation, tax benefits and more. What’s not to like?
But the reality of life as a landlord isn’t so rosy. It’s hard work. It takes time, research and careful study to understand the business. It’s far easier to lose money on rental property than to make money.
In fact, anyone can do it! All it takes is some short-sighted business moves, inexperience, and greed, and you, too, can lose thousands on an investment property. Of course, no one sets out to lose money. But having some guideposts about what you’re doing helps. So here are some of the most common mistakes to avoid when getting into the rental property business:
1. Looking for a home instead of an investment property
Shopping for property as a real estate investor is different than going out and choosing a home to live in. Finding the greatest, most beautiful house on the market or the most gorgeous vacant lot isn’t the aim. You aren’t looking for a house you would live in, you’re looking for something that the average family would rent.
This works on the flipside as well. Something like a distressed house might seem perfect to fix up as a rental but remember, structures like that can turn into money pits. They often need lots of time, investment and permits to go through the remodelling process. Good for a buy, fix and hold strategy, where you are not after instant cashflow. But for a buy and hold strategy, investment properties need to be able to rent as soon as possible.
2. Betting too much on long-term value appreciation
One of the advantages of real estate investing, in general, is that landlords can profit in many ways. First, in the form of monthly rent payments, but again later in the appreciation of the underlying asset.
But it’s a mistake to put too much weight on the latter. Yes, appreciation is a nice bonus when a property sells, but investment properties should be paying for themselves from day one. If it can’t, then it’s not an investment property. I love the quote from Robert Kiyosaki – “an investment is something that puts money INTO your pocket…a liability is something that takes money OUT of your pocket”
In fact, high-priced homes and high-end condos often don’t pay for themselves because it’s difficult to find tenants who are willing to pay that much rent. Instead, smart investors should look for the average home in an average neighbourhood because it will have the most demand, rent the fastest and pay for itself right away. Condo’s in the US particular can be bad investments as you must take into account ALL costs. Very high Home Owner Association fees (HOA’s – read body corporate fees) can make these very bad investments, regardless of how good the view is…
3. Constantly raising the rent
A lot of landlords think that by continuously raising their rents they’ll be able to make more money, even if it means more tenant turnover. But, in fact, the opposite is true. Think about the costs that go into vacancies, from fix-up repairs to updates, to marketing and more. These costs can outweigh any small gains in higher rent. All that raising the rent on a current tenant does is force them to consider what else might be out there and make them more demanding.
Keeping rent the same gives the tenant an incentive to stay and keeps them happy.
The longer they stay, the lower maintenance they are, because they’ll be less likely to call you to fix something for fear that you’ll raise the rent. As long as you start off at a fair, market rate you shouldn’t need to increase it constantly to make money.
4. Only renting to people you like
In my experience, emotion has no place in the rental business, or investments at all for that matter. It’s important to always think about the worst-case scenario: having to evict a tenant. Things happen, and sometimes a landlord has to take action. But can you?
Many people buy an investment property with their first tenant in mind being a friend or their brother. But things happen to everyone and even the best of friends can fall on hard times. Suddenly, what started as an investment property has turned into a messy situation. By renting to people you don’t have that kind of emotional attachment to, it’s much easier to take action when necessary. Now, given that we are investing half way across the world, this can often not be as much an issue, but even for here in Australia, we need to be mindful of this.
All that said, real estate investing isn’t rocket science. By going in eyes-open and avoiding some of the more common pitfalls of novice investors, your chances of success will increase exponentially.