5 Real Estate Mistakes That Could Make You Lose Money
Learn these common missteps before you post that rental listing.
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On the surface, real estate investing seems so easy. Passive income, property appreciation, tax benefits and more. What's not to like?
But the reality of life as a landlord isn't so rosy. It's hard work. It takes time, research and careful study to understand the business. It's far easier to lose money on rental property than to make money.
In fact, anyone can do it! All it takes is some shortsighted business moves, inexperience, and greed, and you, too, can lose thousands on an investment property. Of course, no one sets out to lose money. But having some guideposts about what you're doing really helps. So here are the five most common mistakes people should avoid when getting into the rental property business.
1. Looking for a home instead of an investment property
Shopping for property as a real estate investor is different than going out and choosing a home to live in. Finding the greatest, most beautiful house on the market or the most gorgeous vacant lot isn't the objective. You aren't looking for a house you would live in, you're looking for something that the average family would rent.
This works on the flipside as well. Something like a condemned home might seem perfect to fix up as a rental property but remember that structures like that can quickly turn into money pits. They often require lots of extra time, investment and permits as they go through the remodeling process. Investment properties need to be able to be rented as soon as possible, not sit idle waiting for renovations.
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2. Betting too much on long-term value appreciation
One of the advantages of real estate investing, in general, is that landlords can profit in multiple ways. First, in the form of monthly rent payments, but again later in the appreciation of the underlying asset.
But it's a mistake to put too much weight on the latter. Yes, appreciation is a nice bonus when a property is sold, but investment properties should be paying for themselves on a monthly basis from day one. If it can't, then it's not an investment property.
The fact is, high-priced homes and high-end condos don't pay for themselves simply because it's difficult to find tenants who are willing to pay that much rent. Instead, smart landlords should look for the average home in an average neighborhood because it will have the most demand, rent the fastest and pay for itself right away.
3. Investing with a partner
Yes, there are good reasons for going in on a rental property with another person. Sometimes you need extra capital to close the deal, and sometimes you just want to spread out the risk of loss. But, as a general rule, unless your partner is someone you're legally married to, it's a mistake to get 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 afford a down payment for a loan then you aren't ready for investing. Family members should be your support group, not your angel investors.
The only investing partnerships I've ever seen that succeed are those that are very well defined with everyone's roles and responsibilities strictly outlined. A business is no place for ambiguity.
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4. Constantly raising the rent
A lot of landlords think that by continuously raising their rents they'll be able to make more money, even if it means more tenant turnover. But, in fact, the opposite is true. Think about all of the costs that go into vacancies, from fix-up repairs to updates, to marketing and more. All of these costs can easily outweigh any small gains in higher rent. All that raising the rent on a current tenant does is force them to consider what else might be out there and make them more demanding.
Keeping rent the same gives the tenant an incentive to stay and keeps them happy.
The longer they stay, the lower maintenance they are, because they'll be less likely to call you to fix something for fear that you'll raise the rent. I have properties where I haven't raised the rent in 25 years and I'm still making more off of them than I would if had raised the rent every year. As long as you start off at a fair, market rate you shouldn't need to increase it constantly to make money.
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5. Only renting to people you like
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 a landlord has to take action. But can you?
Many people buy an investment property with their first tenant in mind being their friend or their brother. But things happen to everyone and even the best of friends can fall on hard times. All of a sudden, what started as an investment property has turned into a messy situation. By renting to people you don't feel that kind of emotional attachment to, it's much easier to take action when necessary.
All that said, real estate investing isn't rocket science. By going in eyes-open and avoiding some of the more common pitfalls of novice landlords, your chances of success will increase exponentially.