Many people flock to real estate as a means to secure stable passive income and grow their portfolios, but many of them wind up with the short end of the stick while trying to choose a successful rental property. Even experienced investors have a tale or two about how rough real estate can be in the beginning.
If you’re considering going into realty, you’ve come to the right place. In this article, we’ll be discussing the biggest mistakes you should avoid when purchasing your first rental property.
1. Investing without a real estate strategy
First off, one of the biggest mistakes new investors make is investing without a real estate strategy. Many people think that because the market is stable, they can learn and plan as they go. However, heading into real estate without a plan is a disaster in the making, because it is a capital-heavy investment. So you stand to lose a lot when you don’t have a plan.
Here are some questions you should ask yourself before making your first purchase:
- Am I looking for a suitable property for short-term or long-term rentals?
- How do I plan to finance my purchase?
- What type of tenants would I like to attract?
- What marketing strategies would I use to call their attention?
With a clear outline of what you want and how you plan to achieve it, you’re more likely to make better decisions.
2. Overpaying for a rental property
Next, overpaying for a rental property is another common mistake new investors make. Of course, that isn’t unusual considering they’re new to the real estate scene. But it can set back your business’ growth, especially if you’re not financially buoyant.
Poor research is one factor that leads to investors overpaying for a property–hastily closing what seems like a good deal could make you lose out on a great bargain. It would be best if you patiently weighed as many available options as you could get. Also, don’t be shy to rely on the aid of a real estate agent. They have a better grip of available properties and can even connect you with a seller who hasn’t listed their property.
3. Securing bad financing
After finding a reasonably priced property, another pitfall that new investors fall into is lousy financing. As mentioned earlier, real estate is a capital-intensive investment. It’s tough to secure enough cash to buy a house upfront, so most owners fall on loans to finance such a large purchase.
There are several options you can use to finance a house. But conventional loans remain the most common, so when they request exorbitant interest rates or down payments, nouveau investors might feel they have no choice. On the contrary, you can apply for loans that charge as little as 3% down payments, negotiate a better deal through seller financing, or open a line of credit with HELOC.
4. Expanding too quickly
Real estate is a long-term investment, and it takes a while to reap the rewards. Despite knowing this fact, some investors are impatient and try to do too much too quickly.
For example, you might think securing financing on a bigger house is an excellent idea because you’ll make more interest. But you’ll spend a long time paying it off, and it’ll cost you more in the end because of interest rates. The same logic applies to acquiring multiple properties at once.
Your first rental property should be something you can easily manage. As you gain more experience and become more comfortable in your role as a landlord, you can acquire more properties.
5. Not conducting proper rental analysis
Another common mistake new investors are guilty of is not conducting the proper rental analysis. Frequently, all they look at before buying is the cost of the house and how much rent they stand to make. This mistake often leaves them liable for underestimating their maintenance costs, not budgeting correctly for vacancies, and charging too much or too little rent.
Metrics you should include in your analysis are:
Comparative market analysis – A CMA helps you determine a fair market value for your prospective purchase by comparing similar houses on the market.
Net Operating Cost – The NOI estimates your income after deducting the necessary outgoing expenses.
Capitalization rate– The cap rate measures your potential risk and reward from a particular purchase.
It’s easier to build a successful property rental business when you start on the right foot. Real estate is a stable industry, so there’s no pressure for new investors to rush into a world they don’t understand.
Take your time to do thorough research and lean on experts when you can. You can find a local management company to guide you in your first investment, and help you avoid costly mistakes.