By Joe Edgar
At first glance, investing in real estate seems so easy. Passive income, property appreciation, tax benefits, etc. What’s not to like?
But the reality of homeownership is not so rosy. This is a difficult work. It takes time, research and in-depth study to understand the business. It is much easier to lose money on a rental property than to gain it.
In fact, anyone can do it! All it takes are short-sighted trade moves, inexperience and greed, and you too can lose thousands of dollars on an investment property. Of course, no one is looking to lose money. But having cues about what you’re doing really helps. So here are the five most common mistakes people should avoid when getting into rental real estate.
1. Looking for a home instead of an investment property
Buying a property as a real estate investor is different from going out and choosing a house to live in. Finding the biggest, nicest house on the market or the nicest vacant lot is not the goal. You’re not looking for a house you would live in, you’re looking for something the average family would rent.
It also works on the reverse. Something like a condemned house may seem perfect for turning into a rental property, but remember that such structures can quickly turn into money pits. They often require a lot of additional time, investment and permits during the renovation process. Investment properties should be able to be rented out as soon as possible and not sit idle awaiting renovations.
2. Betting too much on long-term value appreciation
One of the benefits of real estate investing, in general, is that homeowners can profit from it in a number of ways. First in the form of monthly rents, but still later in the form of appreciation of the underlying asset.
But it is a mistake to give too much importance to the latter. Yes, appreciation is a nice bonus when a property is sold, but investment properties should be depreciated on a monthly basis from day one. If not, it is not an investment property.
The fact is, high-end homes and condos aren’t profitable simply because it’s hard to find tenants willing to pay such high rent. Instead, smart homeowners should seek out the average home in an average neighborhood because it will have the most demand, rent the fastest, and immediately pay for itself.
3. Invest with a partner
Yes, there are good reasons to move into a rental property with another person. Sometimes you need additional capital to close the deal, and sometimes you just want to spread the risk of loss. But, as a general rule, unless your partner is someone you are legally married to, it is a mistake to enter into an investment partnership.
Another good way to lose money is to borrow from family members to start your investment business. If you can’t pay a down payment for a loan, you’re not ready to invest. Family members should be your support group, not your angel investors.
The only successful investment partnerships I have ever seen are ones that are very well defined with strictly defined roles and responsibilities. A business is not a place of ambiguity.
4. Constantly raise the rent
Many landlords believe that by continually increasing their rents, they will be able to make more money, even if it means more tenant turnover. But, in fact, the opposite is true. Think about all the costs associated with vacancies, from repairs to updates, to marketing and more. All of these costs can easily outweigh the small, higher rent gains. All the increased rent for current tenants does is force them to consider what else might be out there and make them more demanding.
Keeping the rent the same encourages the tenant to stay and makes them happy.
The longer they stay, the less maintenance they require, as they’ll be less likely to call you to fix something for fear you’ll raise the rent. I have properties that I haven’t raised the rent for in 25 years and I still get more out of them than if I raised the rent every year. As long as you start at a fair market rate, you shouldn’t need to constantly increase it to make money.
5. Rent only to people you love
In my experience, emotion has no place in the rental business. It’s important to always think about the worst-case scenario: being forced to evict a tenant. Things happen, and sometimes an owner needs to take action. But can you?
Many people buy an apartment building thinking that their first tenant is their friend or brother. But things happen to everyone, and even best friends can go through tough times. All of a sudden, what started out as an investment property turned into a messy situation. By renting from people you don’t feel that kind of emotional attachment to, it’s much easier to act on them when needed.
That said, real estate investing is not rocket science. By keeping your eyes peeled and avoiding some of the most common first-time homeowner pitfalls, your chances of success will increase exponentially.
The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are intended for general informational purposes only and should not be construed or construed as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or other personal finance advice. Epoch Times assumes no responsibility for the accuracy or timeliness of the information provided.
