Buying an investment property to rent can be a solid and lucrative investment. However, it also comes with some risks. You don’t just buy any property, sit and wait for the money to roll in. It’s important that you understand what makes a good rental property and how to find it. If you aren’t careful, you can easily fall victim to some of the common rental property pitfalls which can dispel your returns. In this guide, we’ll cover 7 of the most common pitfalls that real estate investors fall into and how to avoid them.
7 Pitfalls of Buying an Investment Property to Rent
Before you consider buying an investment property to rent, take a look at these common pitfalls:
1. Failing to Set Your Investment Goals
One of the most common real estate mistakes made by novices is buying an investment property to rent without a clear vision of the desired outcome. For instance, in a hot market, it’s not surprising to see people on a property buying frenzy and deciding afterward what to do with them.
However, it’s tough to succeed in any business if you don’t know what you are hoping to accomplish. Each real estate investor is unique and their needs will differ. For instance, some will want to take advantage of the property’s appreciation potential while others may want regular rental income to fund their retirement.
Before buying an investment property to rent, make sure you know what your investment goals are. This will help you make the best decisions. You’ll be able to identify the right real estate investment strategy for you, the best type of property to buy, the right financing method, and more.
2. Not Researching the Real Estate Market
Buying an investment property to rent in a poor location can reduce your odds of turning a profit. This is because the location of your rental property has the most impact on its rate of return.
Even before you begin your property search, you should first do your due diligence to find the best rental markets. A good real estate market analysis involves assessing both the city and the neighborhood. The best markets for rental properties have most of the following characteristics:
- Low crime rates
- High population growth
- A growing job market
- A good price to rent ratio
- Proximity to social amenities like schools, hospitals, restaurants, etc.
- Access to public transportation
- Future development projects
- Low property taxes
- Low insurance costs
- Favorable landlord-tenant laws
Researching a real estate market can be time-consuming and frustrating. Nevertheless, you shouldn’t skimp on market research. Fortunately, there are several real estate investment tools that investors can use to get important info on housing markets.
The easiest way to find the best markets for real estate investing in the US is to use Mashvisor. You can quickly find the best city to invest in by checking out city data on Mashvisor’s real estate blog. To find the best neighborhood in your city of choice, you can do a neighborhood analysis using Mashvisor’s Real Estate Heatmap.
3. Not Running the Numbers
Another common pitfall of buying an investment property to rent is basing your investment decisions on emotions rather than numbers. As a beginner real estate investor, you should resist the temptation of becoming emotionally attached to a house. You should do a rental property analysis to make sure that buying the property makes financial sense.
Consider investment properties for sale that will generate positive cash flow and the best return on investment. Mashvisor’s investment property calculator is the best real estate investment tool for performing investment property analysis. With this tool, you will be able to avoid buying rental property that would end up being a money pit.
4. Not Having an Emergency Fund
While rental property with positive cash flow can reduce your financial worries, depending on rental income can be a very risky approach. This is another common pitfall of buying an investment property to rent out.
There’s no guarantee that your rental property will always have tenants. Moreover, unexpected maintenance costs can affect your cash flow and make it hard for you to meet your mortgage payments. Therefore, you should include these emergency expenses in your budget. Ideally, you should have cash reserves that can cover six months of expenses.
5. Not Valuing the Property
When a first-time investor finally finds their dream investment property, naturally, they get anxious and want to close the deal as quickly as possible. However, with such anxiety, you are likely to overbid on the property. Overbidding on a rental property investment means that you may take on more debt than you can actually afford to pay. Consequently, it may take you much longer to recoup your investment.
The fact of the matter is that not all investment properties for sale are priced reasonably. To avoid paying more than what the property is worth, you need to conduct a comparative market analysis. This involves researching what other comparable rental properties in the area have sold for recently. You can find real estate comps easily using Mashvisor’s investment property calculator.
6. Neglecting Home Inspection
Regardless of the age of the investment property you are interested in, failing to conduct a home inspection before buying it is a huge mistake. Some properties may look good on the outside but have some serious underlying problems. You should factor the cost of repair and improvements in your return on investment estimation. Ideally, when buying an investment property to rent, you should focus on properties that are rent-ready or need only a few inexpensive repairs.
7. Getting the Wrong Financing
Investing in rental properties for beginners is usually a challenge due to a lack of capital. Very few people can actually afford to buy their first investment property with cash. Most of them will take out investment property loans. However, many investors who thought they were making good investments end up struggling to keep up with payments because they chose the wrong financing.
Before you choose a lender, research different financing methods and talk to a variety of lenders to make sure that your financing is in line with your investment goals and budget.
The Bottom Line
While buying an investment property to rent can be a smart financial decision, a big return on your investment is not guaranteed. There are several pitfalls that can derail your career in real estate investing before it starts. You ought to be aware of these pitfalls ahead of time and implement strategies to avoid them. By avoiding the common real estate mistakes, you’ll be able to maximize your return on investment.