Buying a rental investment property (or multiple rental properties!) is a great move to build wealth, diversify your investments, and possibly even generate some monthly income. And while you may be excited to get started, it’s not as easy as it looks, so take your time. Consider your reasons behind investing and lay out your plan of attack early so you don’t make these costly mistakes.
Not doing research
Read any books on building wealth and you’ll learn that real estate is a great way to do it. But, that doesn’t mean you should dive right in without doing your research, particularly on which type of property to buy and how to manage it once you do.
The best way to learn is by networking with others in the industry and learning from them. There are also plenty of podcasts, books, blogs, and websites available on how to invest in real estate. You’ll be well served by at least learning before actually purchasing a rental property.
Don’t forget to research the drawbacks of investing in real estate. Knowing these will help you minimize them and reduce your risks.
Not hiring a real estate agent
If you find a great agent experienced in investment properties, they can be worth their weight in gold. Not only will they lead you through all steps of the process, because of their local network, but they may also be able to point you to properties that haven’t hit the market yet. Not to mention, real estate agents have access to your local MLS, and they’ll be able to find off-market properties as well.
Plus, they can help you figure out creative financing options to make sure the deal doesn’t fall through because of lack of funding. The best part is buyers don’t pay real estate commission fees, so it’s certainly worth finding a good agent to guide you through the process.
Buying a property that is too expensive
Buying an investment property at the right price can be a fine art. While you may find a dirt-cheap property, it’s likely in need of major repairs — which can be both a time and money dump. On the other hand, if you purchase a property that’s rent-ready but too expensive, you may not be able to generate enough in monthly rent to cover the cost of the mortgage (i.e. positive cash flow).
It’s also important to consider the purchase price and closing costs. Be sure to factor in other expenses like property taxes, insurance, your mortgage payment, and any utilities you’re paying for future tenants — not to mention vacancy and cost of repairs.
Picking bad tenants
One of your most important tasks as a property owner is choosing the right tenants who will pay rent on time and take care of your rental property. We’ve all heard stories about our co-worker’s uncle John with a tenant from hell that cost him thousands of dollars and trashed the place. Sadly, there’s a pretty good chance John didn’t have a great screening process in place for prospective tenants and his issue could have been easily avoided.
Ensure you don’t have to go through the expensive (and stressful!) process of a tenant eviction by screening all tenants from the start. This includes running a background check, credit report, and income verification on each and every tenant you consider putting in your property.
If you’re worried about tenanting your first rental investment property, consider hiring a property management company to find your tenants, screen them, and move them into the property. They’ll likely charge a one-time fee for the move-in, on top of their monthly fee of about 10% of gross monthly rent, but it could save you tons of money and hassle in the long run. Plus, you’ll be sure you’re following all local, state, and federal landlord-tenant laws and avoid getting sued!
Setting the rent too low (or too high!)
Much like the listing price on a home, it’s important to hit the sweet spot on your monthly rent. Too high and you’ll have too small of a pool of potential renters and they’ll likely go with the cheaper, but comparable option. Too low and you’ll be leaving potential income on the table.
To find the best price, network with other landlords in the area, talk to real estate agents who are plugged into the investment property market, and research other rental listings on sites like Zillow or Facebook Marketplace. Do comps in your area to know with certainty what you should be charging.
This article has been contributed by Ben Mizes.