Buying a property with the intention of using it as a rental can be a sound financial investment. However, there is more to renting out a property in Montgomery County than simply purchasing a home and finding tenants to pay your mortgage for you.
It is important new landlords choose the right property in order to benefit from such a large investment.
Unfortunately, new investors often have very little experience in the field of real estate or business of renting properties and make some very serious mistakes.
Today we will take a look at the 6 most common investment mistakes new landlords make when purchasing their first (and sometimes second and third) property in hopes that you will avoid doing the same.
Top Avoidable Investment Property Mistakes
1. Underestimating Repair Costs
When purchasing a property to rent out, it is easy to underestimate the cost of repairs that need to be done. Watch out for rentals that need a lot of work before it will be “rent ready”. Sometimes great deals on properties are masking the fact that a lot of extra repairs will need to be handled, adding lots of time and money to your budget. That means more time the property will be vacant (because often repairs take longer than initially expected) and more money out of your budget, hitting your profit hard from the start.
Here are some great tips for dealing with repairs on your investment purchase:
- Invest in a thorough inspection. Do not rely on a simple walk through or your own base knowledge of how things should look and function.
- Only use highly qualified contractors to do your repairs to avoid shoddy jobs and overpaying for simple repairs.
- Research the cost of supplies before committing to any repairs either you or a contractor plan to do.
- Always expect the unexpected. There is bound to be something wrong with the home that went unnoticed initially that will require repair. Budget for these surprise costs (some even suggest adding an extra 15% to your estimated repair costs just in case).
Taking care to avoid problem properties and planning ahead of time before making repairs will save you lots of hassle in the long run in terms of time and money. Luckily if you are purchasing in a place such as Potomac, you probably will not view many run-down properties as this region of Montgomery County is known for its luxury housing.
2. Poor Location
One of the most crucial factors to consider for your investment property is its location. Not only should you want it to be in an area that you feel comfortable traveling to from time to time, the location should be appealing to potential tenants.
Be wary of purchasing “great deals” in undesirable locations. Do your homework and research the surrounding areas. In fact, consider a region such as Bethesda; surrounded by shopping centers, high-end apartments, fine dining, and exclusive retail stores, this area is a great place for investing.
Good properties to invest in are usually located near high traffic employment centers. People migrate towards properties that are located near their jobs, and rightfully so. A prime location to keep in mind is Rockville. As home to a large tech corridor, Rockville has an abundance of scientists, interns, and post-graduate students seeking rental homes within a short commute to work.
Remember, there are plenty of properties out there to choose from. You do not need to buy right away and shouldn’t, no matter how great the deal sounds. Investigating your location beforehand will help yield the largest profit in the future.
3. Negative Cash Flow
Being excited about purchasing a rental property is to be expected. However, if you are not careful, you could end up in the red right from the get go. Here are some great ways to avoid creating a negative cash flow with your rental property:
- Avoid investing in a property surrounded by other vacant properties. This hurts the value of your home and indicates that supply is up and demand is low. Instead, look for areas with high demand and low vacancy rates such as Gaithersburg. After the construction of the Intercounty Connector in 2011, the need for housing boomed as the population increased.
- If vacancies become an issue and you have already invested, remain flexible in your rent. It is far better to net less money than expected than to sit on a vacant rental for long periods of time.
- Do the math. After you have paid for the mortgage, taxes, insurance, and any maintenance required, you should still have money left over. If that is not the case, reconsider investing in that particular property.
- Check comparable properties to make sure you are not overpaying for your property. Falling in love with a home and the potential income that property may bring can easily cloud your judgment. This is a business deal, not your dream home. Treat it as such.
4. Overpaying on Renovations
Similar to underestimating cost repairs after your initial purchase, overpaying for upgrades is a common problem for many new landlords.
While it is important to make your property appealing to tenants and it is essential you make necessary repairs so the home is habitable, it is not wise to over-renovate.
Many new landlords want to create a dream home out of their rental properties.
The issue is, not only does that cost a lot of money, but the longer it takes you to renovate what is an already acceptable property (at least it should be if it was a wise investment), the longer it takes you to rent that property out. Don’t forget, sitting on a property is not making you any money.
5. Not Doing Your Homework
There are several regulations required of landlords in Maryland that if not handled properly could land you in some very hot water. Here is what you should look into before investing in a property to avoid any future problems:
- Understand the process behind applying for and receiving a rental license.
- Make sure your property is up to standard requirements with the state’s Lead Poisoning Prevention Program. Investing in an older property takes on additional risks and possibly costs for it to be ready for tenant occupation.
- Remember that certain areas require carbon monoxide alarms to be installed. The property must also pass an inspection before it can go on the market as available.
- Your investment property must understandably be “habitable”. However, everyone’s definition of habitable may differ. Check the local laws regarding your rental property’s livability.
These are just some of the many rules and regulations that must be followed by Montgomery County landlords. Make sure you do all of your homework and know what is expected before trouble comes knocking.
6. Not Having Property Management Group
One of the biggest mistakes new landlords tend to make is taking on too much responsibility at once.
It takes a certain legal finesse to draft a solid lease agreement, tenants will not always pay on time, and maintenance issues will arise at all hours of the night, all of which many landlords cannot handle on their own.
The best solution to this problem is to seek out and invest in a good property management company. If they are a quality company they will be able to handle all of these responsibilities leaving you to reap the benefits of being a rental investor.
If you are in looking to invest in the Montgomery County areas such as Silver Spring or Chevy Chase, consider Bay Management Group for all of your property management needs.
After investing in a valuable rental property by avoiding all of the above-mentioned mistakes, let us take care of the rest.
Knowledgeable in all areas of property management, because that is all we do, you will be able to have more free time and the peace of mind that everything is being taken care of.