Thinking of becoming a real estate investor or you already are? We have few common errors made by real estate investors that must be avoided to be successful, have a strong ROI, and to avoid losing your mind. Real estate investing is much more complicated but then HGTV makes it look, but avoid these errors you will have a better chance of success. Over the next week or so we will be releasing our top 5 errors to avoid as you start your real estate portfolio.
#1 – Not Valuing Your Time
Your time is worth something. Spending your entire weekend trying to snake a sewer line or repair a garage spring just simply is not worth it. Call a professional and get it done right the first time. Unless you are general contractor with lots of repairs and maintenance knowledge you’re much better off using a professional. If you try and fix every maintenance request your tenants have, you will lose your mind and eventually hate your investment. Spend a few dollars and have repairs fixed professionally. Not only will you be able to spend your weekend doing something you enjoy, the project will be done correctly the first time. Real estate investment is about cash flow, but you should not spend 15 hours of labor plus parts to save $200 in cash flow. It’s not worth playing in sewer water or risking major injury with a compressed garage spring!
#2 – Deferred maintenance and cutting corners.
Do repairs and maintenance properly and quickly. Small issues quickly become larger issues and you may not even know since you’re not living in the home. A small drip from a faucet will eventually become larger, it will ruin tiles and sinks and bathtubs, and eventually cause mold and many other issues. You’re much better off to fix it and fix it properly. If you cut corners and use cheap band-aid fixes your investment will eventually be barely held together. Tenants that realize your cheap and don’t care, also don’t care about the condition of the property. One example is used appliances. Don’t buy beat up used appliances off craigslist. You will not get a good life out of them and you will waste your time (see error 1) installing appliances over and over. Buy entry level appliance from a professional supplier with a warranty. They will last longer and your tenant will be happy to have new appliances.
#3 – Emotional separation from your home.
Have you lived in your home for many years and you’re taking a big step moving out and renting it? This can be a great idea but you need to emotionally separate yourself from your home. You have poured your equity, blood, sweat and tears into your home. Many people have worked their entire lives to own that home and they have extreme pride in it. Pride in ownership is very important to real estate investment but you must realize that your new renter will not hold the home in the same regard. Most tenants treat their homes very well but there will always be a separation between ownership and renting. Your home will likely still be in great shape, but over the term of the lease whether it be months or years the home will have wear and tear and it won’t always be perfect as you left it. Don’t stress over it. Enjoy the rent checks and appreciation from your investment.
#4 – Emotional Separation from your tenant.
Being a landlord takes thick skin. Confrontation will eventually happen. Its critically important that as a landlord you do not have an emotional connection with your tenant. Do not rent to friends or family and make it very clear to your tenant that this is a business. One of the hardest lessons in becoming a landlord is being stern yet polite with tenants. It needs to be very clear that you are polite and understanding but that rent is due and must be paid on time. I have heard every excuse you can imagine (lost jobs, sickness, sick pets, lost money orders, relocation, jail, neighborhood violence, etc). You must remember that this is a business and not charity and that even though those are legitimate excuses, they are still excuses. If you tenant has short term financial setback, recommend they reach out to community programs for assistance. Most cities have some assistance available to help pay rent if there has been a major setback for a good person. If you are going to have a successful rental you must have a zero tolerance for unpaid rent. Don’t feel bad, you are running a business and will be taken advantage of if you open yourself to it.
This is one of the most important reasons to have a property manager. Are you prepared to tell a sickly or aggressive tenant to vacate? Are you prepared to tell someone who just lost their job that they need to vacate? Are prepared to send them to the attorney and meet the sheriff to evict them? It’s unlikely, but is a reality of real estate investment. It will eventually happen, even if you only own and manage one property.
#5 – SOMETIMES LESS IS MORE!
One of the most important rules of real estate investment is to operate realistically. Know and understand comps in the area and expect to make a little less. If you overperform that’s great, but always understand the worst-case scenario. We often recommend that you list your property slightly under market rent. If you are unrealistic about the rental rate the home will sit vacant for at least a month. If you by some chance do get it rented at above market rent the new tenant is probably not stupid, they are just desperate. They are either not well qualified or they are using the home as short term alternative until they buy a home or rent something else. This will cause more vacancy and now you have lost more than just one month’s rent.
If you keep your rent reasonable you will have many well qualified tenants apply and it will rent quickly. You will avoid vacant time and the tenant will know they have a decent deal. Tenants that think they are getting a deal, treat the home better and stay longer.
If you rent your home for $2,000/month but it sits vacant for a month you missed on out $2,000. If you instead rent it immediately at $1925 you have missed out on $900 of cash flow but saved $1,100 in vacant time. Not to mention if the tenant treats the home better and stays longer the net increase from the $900 in lost cashflow is massive.
It is critical to remember this is not a get rich quick scheme. In residential real estate investment, you must keep the home occupied and with good tenants, regardless of the monthly rate. Remember, SOMETIMES LESS IS MORE!