More people now realize the importance of investing. They like the idea of building passive wealth while owning many tangible assets. Rental real estate seems like a perfect option.
However, many people invest in rental real estate without doing their homework. As a result, they make big mistakes that could cost them dearly in the future. If you, too, are planning on buying real estate that you can rent to others, make sure you avoid these mistakes.
Paying Too Much for the Property
One of the biggest mistakes people make when investing in rental real estate is more than they should pay for the property. They think they must buy the most expensive house on the block or in the neighborhood to make an excellent rental property. In reality, that’s not true at all.
What you should be looking for is a property priced below market value. This way, you can get instant equity in the property. Even if it needs some work, you’ll still be ahead financially.
To ensure you are not paying too much for real estate, do your homework and research recent comparable sales in the area. This will give you a good idea of what the property is worth. You can check online resources or ask a real estate agent for help.
Not Doing Enough Research on the Neighborhood
When it comes to rental real estate, location is critical. No matter how beautiful the property may be or how much potential it has, it will be hard to find tenants if its location is in a bad neighborhood. And even if you do find tenants, they may not stay long.
To avoid this mistake, do your homework on the neighborhood before you buy a property there. Consider the kinds of tenants you wish to attract. This will give you a better idea of what neighborhood would be a good fit.
Next, research the crime rate in the area. Also, check out the schools if you are looking to attract families. Many websites provide this information.
Not Factor in All the Expenses
Another mistake that novice rental investors make is only factoring in the initial expenses of buying real estate. Remember that since your plan is to rent the property out, you will also have to account for ongoing costs.
Just some ongoing expenses you will need to factor in are:
- Utility bills
- Property taxes
- Mortgage payments
- Insurance premiums
- Association dues (if any)
- Maintenance and repairs costs
- Advertising costs (to find tenants)
- Lawn care and snow removal expenses
If you don’t factor in all these expenses, you may find that your rental property is not as profitable as you thought it would be. This could leave you in a difficult financial situation.
Paying for the Property in Cash
Some investors believe the best way to buy a property is by paying the total amount in cash. While this may save you on interest payments, it’s not always the smartest move.
For one thing, if you pay cash for a property, you will have no liquidity. This means that if an emergency arises and you need money, you won’t be able to access the funds tied up in your investment property.
Another downside of paying cash is that you will miss out on the potential return on investment (ROI) you could earn if you took out a loan and invested the money elsewhere. Of course, there is always the risk that your investments may not perform as well as you hope, but it’s still something to consider.
Instead of cash, consider applying for a mortgage instead. There are different types of home loans that allow you to buy an investment property with a low down payment. This way, you can keep your liquidity and still benefit from the property’s appreciation. All it takes is to find a reputable lender with an excellent track record and to compare your options. The right lender will consider your situation and offer you a loan that fits your needs.
When buying a property, it’s crucial to inspect it before making an offer. This is true even if the property appears to be in good condition. Don’t forget that even in real estate, appearances can be deceiving.
A professional inspection will reveal any hidden problems that require fixing. If you skip the inspection, you could pay for expensive repairs down the road. In some cases, the restorations may be so costly that they exceed the property’s value. This would obviously be a terrible investment.
To avoid this mistake, hire a qualified inspector to check the property before buying it. This way, you will know exactly what you’re getting into and can budget for any necessary repairs. You can even use the home inspection results to negotiate with the seller for a better price.
Investing in rental property can be a great way to generate income and build wealth. However, it’s not without its risks. By avoiding these mistakes, you can increase your chances of success and enjoy the most out of your investment.