When you’re a rental property owner, it’s easy to make a mistake here or there. After all, you’re human. And you’re juggling a lot of responsibilities: making sure your tenants are happy, maintaining and upgrading the property, and looking for ways to improve the bottom line. Fortunately, a lot of mistakes can be easily rectified. Then there are others which could put you in the red for a long time. Here are the five biggest mistakes that property owners need to avoid.
Buying a Property Without Cash Flow
My biggest number one warning is to never buy a property that doesn’t cashflow. Of course, you would never do that. After all, you’re diligently plugging in your numbers when you’re evaluating a property. But let me ask, where did you get those figures? Sometimes, people will “run the numbers” on a property, but they could be figures that the property’s current owner provides. Sometimes a property owner will try to entice you with numbers that are either overly optimistic or just plain wrong. After all, they’re selling this property, so it’s possible that they never had a good handle on how much they were bringing in and how much was going out every month. If you’re in negotiations to buy a rental property, it’s your right to look at their expenses and their rent rolls to verify their income. If the seller balks at providing that information, that’s a big red flag.
Another way that people can unwittingly buy a property that doesn’t cashflow is because they’re not factoring in realistic numbers for maintenance and upkeep. When you’re evaluating a property’s cashflow potential, there’s a temptation to “make the numbers work.” This totally defeats the purpose of running the numbers. You want to discover if the property will actually cashflow.
Not Getting an Appraisal or Inspection
Is the property actually worth what you’ve agreed to buy it for? The appraisal and inspection will help determine that. In the appraisal process, an appraiser will evaluate aspects of your house that are plainly visible: the square footage of the house, the lot size, the number of rooms, and numerous other aspects that will determine if the price is in line with what other comparable homes, or “comps” are selling for. With the current housing market, where all-cash offers and bidding wars have become common, it’s easy to think that waiving the appraisal is a good idea. And truly, if you’re in a hyper competitive market, waiving the appraisal may work in your favor, but there’s still a risk. If you do waive your appraisal and then decide to sell in a few years in a less frenzied market, you could discover that you overpaid by so much that you’ve canceled out any potential appreciation.
The inspection is the other major fact-finding part of the buying process. This goes beyond the appraisal to look at a home’s infrastructure. Does the house need a new roof, a new HVAC system, or a new foundation? Any of these could be very pricey repairs. If you’ve waived the inspection, you have no idea if the property is worth what you’re paying. I couldn’t imagine a more disappointing or easily preventable scenario than discovering that a property I just bought needs lots of costly repairs.
Investing Based on Appreciation
We are in a hot market right now, but we don’t know how long that will last. If your investment strategy is to only hold onto a property with the expectation that it will appreciate, you’re entering into a speculative area where you’re at the mercy of the market. You don’t know when the market can take a dip. Even if the overall economic landscape looks strong, that doesn’t necessarily mean that your submarket will remain strong. A major employer could move or an industry in your community could take a hit, either of which would drive down demand for housing. Rather than relying on your property to appreciate, it’s better to stick to a long-term cashflowing strategy.
Hiring Bad Property Management
It’s impossible to overstate the importance of good property management. When you’re looking for a company to manage your property, make sure to ask for references and talk to their current clients. If possible, you should also talk to some tenants at these properties. Ultimately, it’s the tenants’ satisfaction level that will matter. A good management company will be able to retain residents. A bad property management company will ignore tenants’ needs and cause them to move out at the first opportunity. Also, be sure when you’re hiring a property management company that their payment is tied to actual occupancy, not the number of units in a building. If a management company has a financial incentive to keep your property occupied, you’ll be more likely to get the results you want.
Making Decisions Based on Emotion
Don’t ever fall in love with a property while you’re still in the negotiating phrase. And definitely don’t tell yourself that a certain property “feels meant to be.” You can fall in love with your property once it’s yours. With real estate, it’s especially easy to get emotional. A certain property may remind you of your childhood home. Or you may get your heart set on a property because you’ve been driving by it for years and always loved it. But always bear in mind that you won’t be living there; your tenants will be. The main factor for whether a property is right for you is if it cashflows.
