Real Estate investing is a business. Treat it as such and you will be in a position to earn a stable and reliable income for some time. Invest poorly or make some of these common mistakes and you can seriously hurt your business.
In this article I am going to touch on the most common mistakes that both first time investors and more seasoned investors make. Take note of these errors and try to avoid them at all costs.
Failure to Research
Research is imperative. You need to understand the ins and outs of your chosen market place before investing and you really need to do your research. Speak with local brokers and get a feel for the market, try to understand who rents in your area, what the average rental figures are, how long it takes to rent properties in the area and when the best time to invest is.
Treat investing as a business; you wouldn’t invest in any other business without doing a thorough check on the finances, etc. It often works best to invest in an area you know and can identify with or where you have links with a great broker that you can trust with your investment.
Not Understanding Tenants
Researching the property market you are hoping to invest in is a must, but it also pays to know who your clients will be and what they will be looking for. You need to think about what type of property your desired tenants will want and what kind of features they will be expecting.
Find out who the most common tenants are in your area and purchase a property based on that. If you are looking at a high turnover city centre location, aim for studios or one beds that will appeal to the single or couples that will dominate the market. Likewise if you are looking at the suburbs, purchasing larger more family friendly properties would be the way to go.
Think long and hard about who your tenants are going to be and try to appeal to the largest section of the market. Using this information can really help you to target your investments and get the best return possible.
Knowing your area and tenant demographic will help you to focus your budget. Knowing what you are planning to spend and sticking to that amount is important when dealing with investing. You musty use logic to ensure that you do not overspend and stick to your budget.
Remember that the property you are investing in is not for you and doesn’t have to be right for you it just needs to be right for the largest section of the market. As such, if one property doesn’t meet your budgetary requirements move onto the next.
Overspending can really set you back in investment terms and can be a mistake that is hard to rectify. Use your head over your heart and spend what you need to rather than what you want to. Keeping a tight rein on your budget when purchasing is great practice for the rest of your time as a landlord and will help you get into the habit of making budget focused decisions.
As with overspending on the initial purchase it is very easy to get swept away and massively overspend on any refurbishment works you do. It pays to prioritise any works you are doing to those that will make the most difference when it comes to improving your rental return.
Freshening up bathrooms and kitchens, whilst expensive will always have a greater effect on the level of rent you achieve than simply repainting walls or changing flooring.
Try to be pragmatic and purchase good quality, durable items and fixtures rather than expensive designer goods. Super modern stylised homeware tends to date quickly and will need replacing more often than more classic, functional pieces.
Aim to purchase items from the mid of the market (cheap will break frequently and too expensive items won’t add value) and buy things that will stand up to tenant wear and tear and appeal to the largest number of people possible.
Over Estimating Rent
When formulating a budget and business plan for your rental business over estimating the return you will get in the form of rent can be catastrophic. It can cause you to over invest, purchase in areas that are not as desirable to tenants and can really mess up your loan or mortgage repayments.
You need to do your homework and speak to brokers that you can trust to get an idea as to the true value of the property you planning to invest in. Ask as many questions as possible and try to find out if any similar properties have rented recently that you can use as a guide for the value of your property.
It also pays to take into account the seasonality of rental investing. There are periods of the year when rents are lower and periods of the year where less people are moving. If your property falls into one of these slacker periods you may be hit with lower rental values or even suffer from longer void periods which will hit your income drastically.
My advice would be to also use the lower end of the scale when making your business plan, as this will help you see if your business is viable even in tougher times. Hoping for the best is always an irresponsible way to run a business and will often lead to failure.
Dealing with the Wrong Brokers or Property Managers
Be incredibly careful who you allow to handle your property as a poor property manager or broker can ruin your rental business by not taking care of issues at the property or by under valuing and renting the property to unsuitable tenants.
As with buying, do your research. Speak to a few brokers before you decide and have a set list of questions to ask each broker so that you can compare their response. Meet with the areas best brokers and also some smaller more independent brokers and try to get an understanding of their business models and how much attention your property would get.
Ask them about their history of dealing with similar properties to yours and see if they have a property manager they would recommend. When dealing as a first time investor my advice is always to deal with a good broker and property manager. It may cost a little more but the support they are able to provide could be the difference between a successful and unsuccessful business.
Confront problems head on. Never allow issues to fester and get worse. You need to handle any maintenance issues or problems with the tenants at the earliest possible point. Ignoring problems can lead to greater issues in the future and can ruin relationships with tenants.
Always pick up maintenance problems as soon as they are reported as it is not uncommon for minor issues to lead to further problems that can turn very bad quickly. It pays to have an emergency fund for dealing with issues so that you are not caught short of cash when it comes to fixing problems.
Similarly, with any personal problems that you face with your tenants, stepping in and dealing with the problems head on rather than becoming unavailable can make problems go away much quicker.
If you have a busy personal and professional life employ a property manager to take care of maintenance issues and deal with tenant relationships so that you don’t have to.
Remember a positive experience for your existing tenants is likely to lead to renewals and more revenue for you. Tenants that are treated poorly or have their issues ignored are likely to leave, leaving you with no source of rent until new tenants are found.
Not Keeping Records
You have to treat your property investment as you would treat any other business. This means methodical record keeping is a must. You will have tax returns to complete and more than likely have substantial incomings and outgoings against any property investments you have. It will be nearly impossible to keep track of costings if you are not keeping records.
Likewise, when dealing with property managers, brokers and tenants it pays to keep logs of all of your interactions. This will be helpful if there is an issue that is being disputed and also means that you are fully up to date with everything that is going on with your investment.
You need to think rationally about all facets of your investment and running the property investment like a business will help you to stay on top of everything that is happening with your property.
Tenancies and a rental investments have many moving parts and there are potentially lots of things that can go wrong so being on top of your brokers, property managers and tenants is the only way to get the maximum from your investment, whilst also protecting your investment in the long run.
Not Refurbishing Frequently
A rental property requires frequent attention and will from time to time require updates. If you keep on top of any necessary works this will keep overall costs down and will mean that you can do works bit by bit. If you let the property fall into disrepair you are unlikely to find new tenants plus will need to take the property off the market whilst works are being carried out.
Try to schedule your works for the year at the start of every year and stick to that schedule. Keeping the property fresh will help increase the rental value year on year and will also keep the capital value of the property rising. You should be trying to avoid doing anything that can hurt your investment and ignoring necessary refurbishment works can really harm your investment.
Buying Cheap Furniture
It seems obvious that keeping costs as low as possible is the best way to go, but this is simply not true. Tenants will be looking to live in nice, homely properties and will avoid cheap and tatty feeling rental homes. As such there is a definite correlation between landlords that have underspent on their properties and those that achieve the lowest rents.
Now, I am not suggesting that you spend a fortune on dressing your investment, but avoiding anything that feels cheap will give your property a better overall feel. You need to remember that the rental market is incredibly competitive and you will need to make your property stand out against lots of other properties and it is hard to do this cheaply.
My advice would be to look at using one of the many landlord specific furniture companies who can dress an entire property relatively cheaply and often offer hardwearing, more tenant focused furniture.
It seems like a lot to take in and of course there are many potential pitfalls to consider, but if you take suitable advice, think logically and stick to your budget you will be able to run a successful, profitable rental investment that gives you the potential to invest in more and potentially grow your portfolio.
Do not approach investing alone and take advice from seasoned investors where possible and discuss your plans with any financial advisors or brokers that you trust. Putting in place a team of people that can help you run your rental investment is the best course of action and can prove a very shrewd move in the long run.