Buying cash flow real estate to hold is still one of the best financial strategies in today’s market. However, avoiding costly mistakes is crucial, especially with beginners. Here are 4 key mistakes to avoid when buying investment real estate:
1) Leaving out management, vacancy, maintenance in calculating cash flow
We see this mistake a lot in investor projections. Some investors only use rent amount versus PITI to calculate cash flow. If you do not have room for 8-10% in property management, 4-6 % for vacancies and 6-8% for maintenance, then you could end up losing money over time. It is much more accurate to take 70-75% of the rental number to calculate cash flow.
2) Self-Managing and/or hiring the wrong managers
Many do it yourself landlords choose to manage properties themselves, which is great, but most DIYers have no idea what is involved in properly managing and maintaining rental real estate. Tenants walk all over them, do not pay rent, and do not properly maintain the unit. Maintenance gets deferred and potentially dangerous situations crop up, creating a huge liability exposure to the property owner. All of these problems can be avoided by using a professional property manager who manages the tenant relationship and actively cares for your investments. Employing great managers will allow you to generate passive income and free up your time to look for more profitable investments.
3) Adding too many property upgrades
Do not overdo upgrades for rentals. Stay within the neighborhood norm. You are not living in the home or flipping it. Only do those upgrades that will increase rent, get tenants faster, keep good tenants longer, or prevent costly future repairs. Do major upgrades before you sell, not before you rent. Consider heavy cosmetic changes such as carpet, paint, lighting and plumbing fixtures. Make sure mechanical systems are running smoothly and safely.
4) Only buying a home you would live in or that is near your home
We frequently get calls about the “foreclosure right down the street.” Usually the numbers don’t work, but many people are more comfortable investing in their own neighborhoods, so I understand why they do it. But your motivation should be to buy a rental because the numbers work, not because you feel comfortable. Never bring emotion into investing.
As always, we are here to help our investors when it comes time to buy another rental property. And remember to avoid these 4 key mistakes and you will be successful in your real estate investing activities.