While investing in a rental property can be profitable, there are lots of pitfalls along the path.
Buying real estate, maintaining it, and finding quality tenants can help you build sustained cash flow. And the property itself can appreciate in value over the years and decades you own it.
To maximize the upside potential, however, you must avoid certain mistakes that can turn a dream of cashing out down the road into a nightmare if errors drain your profits.
Whether you’re shopping for a rental property—or already own one—here are four newbie mistakes to avoid if you’d rather retain your investment and get the best ROI possible.
1. Not Thoroughly Screening Tenants
Your tenants are your cash cow as far as your real estate investment is concerned. In the absence of good tenants, even a beautiful property in a prime location could be a money pit. Most landlords rush to fill a space and don’t properly screen an individual’s past.
Non-paying, property-vandalizing, or disturbance-causing renters can lead to lost rental income, expensive repairs, and even litigation. It can cost thousands of dollars in attorney’s fees and take months to evict a bad tenant after they have taken up residence in the property.
It pays to invest in a property management firm that can help you get quality tenants. But one service provider isn’t necessarily as good as another. You should stay local. What this means is that you need, for example, a Houston apartment property manager if you have a Houston apartment.
2. Lowballing Recurring Expenses
Many new rental property buyers believe they will make money by merely subtracting the mortgage payment from the collected rent. The reality is, however, that the costs of owning and operating a rental property go far, far beyond mortgage payments.
Repairs, maintenance, utilities, property management fees, insurance, and property taxes will all chip away at profit. If you don’t budget for these additional expenses, they’ll take what appears to be a profitable property and turn it into a money-losing proposition.
Here are some things you can do to avoid running out of money and getting into trouble:
- Budget at least 1% of the value of the property annually for maintenance and repairs.
- Budget for vacancy periods
- Obtain insurance and property management quotes upfront.
- Create a reserve fund for unexpected expenses such as roof repairs or replacing appliances.
A realistic budget will help keep your property in good shape and lower your stress level.
3. Not Paying Attention to Local Laws and Regulations
Landlord and tenant laws differ widely from state to state, province to province, and town to town. They vary from the notice you have to give in order to enter a building to how you have to treat security deposits. Disregarding or misunderstanding these laws will land you in deep trouble.
As one example, if you botch an eviction, you can be on the hook for thousands of dollars in court fees, and neglecting to follow safety codes can leave you liable if a tenant is hurt.
4. Overleveraging Your Investment
Real estate investing can sometimes involve taking on debt, and borrowing against the property. But borrowing too much or failing to make provision for the impact of fluctuating interest rates can jeopardize your rental property.
If rental income barely covers mortgage and costs, any disruption—a vacancy, unexpected repair, or rate increase—can put you in the red. Overleveraging won’t only keep you up at night, but also make it hard to weather economic downturns.
Investing in a rental property can be profitable, but you can only succeed long-term if you make smart decisions along the way. By thoroughly screening your tenants, budgeting for expenses, adhering to local regulations, and not over-leveraging yourself on loans, you’ll be in a position to secure your investment and set yourself up for long-term success.
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