Owning rental properties can be a lucrative business plan if managed correctly. After all, being a landlord is no simple task. A ton of time, money, and effort goes into investing in rental properties and remaining successful. However, if you’re a new investor, it can be challenging to recognize the red flags of an investment property. Keep reading to learn some of the biggest investor mistakes and how to avoid them.
5 Investment Property Red Flags
Not every property is going to work out. You may find an excellent rental home online that turns out to be a fail when you see it in person. Before you get too far in the investment process, recognize these red flags before making a huge mistake.
- Cheaper Isn’t Always Better
- Avoid Elusive Sellers
- Ensure Your Numbers Add Up Correctly
- Avoid Investing In Declining Areas
- Property Size Matters
Cheaper Isn’t Always Better
Just because you find a cheap rental home to buy doesn’t mean you should go through with it. Unless you’re looking for a fix and flip property, steer clear of listings that are too good to be true. After all, you have to beware of homes that are sold “as is” or advertised as “needs a little fixing.”
Major renovations and repairs cost a lot of money. So, don’t get too involved in a cheap real estate listing unless you’re ready to spend the time and money fixing up a damaged property.
Avoid Elusive Sellers
If you think a seller is hiding information from you or being dishonest, they probably are. For example, if your seller can’t answer questions about lot size, boundary lines, zoning restrictions, and square footage, that’s a major red flag. Not only is this information crucial for someone looking to buy a rental property, but it’s information that everyone should have access to.
It’s important to do business with people you trust. However, even if you have confidence in a seller, remember due diligence before getting wrapped up in a sale.
Ensure Your Numbers Add Up Correctly
Investors must run the numbers before any potential investment. Before you commit the time and expense to make an offer and perform due diligence, make sure the property is worth it in the first place. After all, you can’t rely on a seller’s spreadsheets showing significant returns; you have to do the work yourself.
Some of the rental analysis tools you’ll want to use may include:
- Gross Rent Multiplier– Gross rent before subtracting expenses
- Cap Rate- Rental income after expenses
- 1% Rule- Gross rent should equal 1% of purchase costs
- 50% Rule- Estimates Net Operating Income (NOI) used on 50% of gross rent
- Cash-on-Cash Return- How much of your down payment comes back as cash
- Calculating Equity- Shows the difference between fair market value and your liability
- Pre-Tax Net Income- Shows after financing costs
These tools can help investors determine whether a property is profitable or not. Don’t become overly involved in a rental that won’t give you the returns you want.
Avoid Investing In Declining Areas
Nobody wants to live in a “rough” or declining area. If the neighborhood looks like it needs work overall, it’s going to be noticeable to potential renters. Pay attention to the condition of the area’s streets, sidewalks, and other properties. If they all are in need of repair, it’s going to be hard to find renters.
Pay attention to the school ratings in any location. This data can tell you a lot about an area. For example, one of the biggest investor mistakes is buying a property without analyzing the crime rate and potential risks. After all, purchasing a property in a high-crime area puts your investment and your tenants at risk. Not to mention–it’ll be harder to find tenants willing to live there.
Property Size Matters
Houses that are too large or too tiny don’t make the best rental investments. The larger the home, the higher the maintenance costs will be. Furthermore, renters with tight budgets aren’t going to want to pay high prices for a larger rental.
Along with that, small rentals could scare away families looking to expand or renters looking for roommates. Although you can always add on rooms or make renovations, you have to consider the costs it takes to do so.
Biggest Investor Mistakes
If you’ve successfully avoided the red flags of a property sale, that’s awesome! But, that doesn’t mean the hard work is over. Here are some of the biggest mistakes to avoid as you navigate your new investment property.
- Underestimating Costs
- Not Accounting for Vacancies
- Neglecting to Inspect
If you’re investing in rental properties, you’re likely looking for a decent return on your investment. First, however, you have to account for the costs it takes to start and run your business successfully. If you underestimate the costs it takes to create and maintain a rental company, it will not end well.
Not only do you need to consider the initial costs of purchasing a property, but the cost of maintaining it over the years. Some of the most significant expenses to consider include:
- Property taxes
- Mortgage interest
- Large repairs or renovations
- Routine maintenance
- Utility costs
Not Accounting for Vacancies
Every investor must account for vacancies in their rental properties. You never know when a tenant is going to leave and when you’ll get your property occupied again. If you expect your rental to be occupied at all times, it could cause you to underestimate business costs, leaving you in a tight financial situation.
To avoid putting yourself in a tough spot, it’s crucial to account for vacancies and save enough money to cover property expenses for up to three months. Although it’s the worst-case scenario, you don’t want to rush the process of finding a new tenant just to find out they aren’t reliable.
Neglecting to Inspect
If you’re thinking about purchasing any type of real estate, you should also be thinking about an inspection. To ensure the property is compliant with building codes, fire codes, and safety standards, you must complete a full assessment before making it a rental property. That way, if there are any concerns, you can complete repairs before allowing a tenant to occupy it.
With an initial property inspection, landlords and property managers should complete move-in and move-out inspections between tenants. During these short walkthroughs, you can identify any damage, issues, or concerns with your rental property.
Tips for Avoiding Common Investor Mistakes
Now that we’ve gone over some of the most significant investor mistakes let’s discuss how you can avoid them at all costs.
- Prioritize Maintenance– Maintenance in a rental property is extremely vital. Your top priority is keeping your property up-to-date, well maintained, and safe for tenants.
- Don’t Forget Due Diligence– Due diligence is an investigation or inspection that buyers perform to ensure the property is worth buying in its condition. Forgetting this process can leave you with a property that needs more repairs than it’s worth.
- Work With Qualified Professionals– Working with qualified professionals is crucial in the rental business. With a trusted rental property management company in Washington DC, you can feel at peace knowing your investment is cared for.
Hire Qualified Management Professionals Today
When it comes to owning and operating rental properties, it’s hard to do it all on your own. After all, you are responsible for maintenance, repairs, tenant screening, lease agreements, rent collection, and general management. Now, the work doubles or triples if you own more than one rental property.
Luckily, with the help of qualified professionals, you don’t have to do all the work yourself. For instance, Bay Property Management Group is a top-notch rental management company that offers comprehensive services. Contact BMG today if you need rental management services in Baltimore, Philadelphia, Northern Virginia, or Washington DC.