Rental Investors: Avoid These Four Profit Killers .
By Kerry Curry, Contributing Writer
Enthusiasm can get the best of first-time residential real estate investors who’ve made the decision to invest and can’t wait to buy and rent out their first property. But wait! Strong profits and a steady income stream are certainly possible for real estate investors who make smart decisions, but you can also lose your shirt, so to speak, so it’s best to take some time and avoid these common first-time real estate investing mistakes.
- Overpaying for a property. Too much enthusiasm and too little due diligence can cause property investors to make a poor decision on what to pay for a property. Housing prices have been on the rise for about four years and fewer distressed properties (which typically sell below market value) are available. Inventories of market-rate properties are also extremely low in many neighborhoods, which means the risk of overpaying or getting into a bidding war may be higher than it has been for several years. Make sure your buying decision is based on logic and not emotions. If you are financing the purchase, you need to be sure you can afford the monthly payments and still have a robust reserve available for unforeseen expenses.
- Over-renovating. Block out all of those television shows where they take the ugliest property on the block and make it a showcase of epic proportions. In order not to over-improve, a real estate investor should have a good understanding of the neighborhood where his or her rental property is located Don’t add granite countertops and hardwood flooring if all the other rental properties on the street have laminate counters and carpet. Why? A renter who demands higher-end finishes won’t be willing to rent in a modest neighborhood where lower-end finishes are the norm. Be smart about the improvements you make.
- Slow turnaround. When a residential rental property sits vacant, it isn’t making the investor money and, in fact, it will quickly become a money drain as expenses such as taxes and insurance will still be there. If you are about to buy a property and know it needs repairs and renovations before it can be rented, make sure you are prepared. That means you’ve hired a contractor or handyman and they’ve given you an estimate of the cost and the time it will take to get the property rent ready — and you know when they can start. To limit the amount of time your property sits vacant, you’ll also want a robust marketing plan to reach potential tenants leading up to your rental’s go-live date. Remember: Every day is money. Don’t waste it.
- Underestimating expenses and capital expenditures. It’s important that the first-time investor considers the one-two punch of repairs and capital expenditures. Repairs are those monthly or annual maintenance items that will crop up on a regular basis: Fixing leaky or broken faucets, patching drywall, painting, servicing the air conditioner and furnace, cleaning the gutters and many others too numerous to mention. Capital expenditures are big-ticket items such as replacing a hot water heater, furnace, roof or major appliances. You need to plan for both, and it’s best to over estimate as first-time investors tend to under estimate expenses in this area.
This isn’t an exhaustive list, but rather an initial look at a few likely risks to the bottom line. It never hurts first-time investors to talk with experienced investors who’ve been doing this for a while. Reach out to a local real estate investment networking group if you don’t know anyone. Residential real estate investors are generally a friendly bunch and may have some sound advice on other common first-time investing mistakes to avoid.
B2R Finance offers rental investors innovative lending products to help unlock equity from existing portfolios and provide the cash needed to build rental portfolios nationwide. For more information about how B2R can help you obtain rental property financing, just call 800-227-8107 or visit http://www.b2rfinance.com/apply-now and follow us on Twitter @B2RFinance.
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