Did you know that many Americans (40%) say that buying a new home is the most stressful event in their entire life? So much so that Americans are avoiding buying homes completely.
You can imagine that buying several homes for investment purposes could be even more stress-inducing than that. But if you wish to grow your passive income and become financially free, then investing in real estate is the way to do it.
In the article below, we speak of some real estate investment tips that can help you avoid mistakes and grow your portfolio stress-free, so keep reading.
1. Not Pacing Yourself – Buying Too Many Rental Properties at Once
It’s easy to get overenthusiastic when purchasing rental properties because you can see how, the more you increase your passive income, the more freedom you purchase. But don’t be foolish about it.
Slow and steady wins the race in real estate investment (and in life in general). Buy one property at a time, and ensure that you aren’t purchasing a rental property that’s too expensive for you right now either.
Yes, it’s tempting to believe that you can handle any cash flow issues in the future with an emergency fund or by remortgaging, but you don’t ever want to fall into such dire straits. It’s always better to buy a smaller property that’s within your budget with a smaller cash flow than to overdo it and regret it later.
Also, you never know when the market might crash or go through a dip, and if you are overextended, any fluctuations in the interest rates (or inflation) will cause you to feel stressed out financially. It could even lead you to declare bankruptcy and decide that the whole real estate investing gambit is a farce (it’s not).
You got into real estate investing to build a solid financial future for yourself and your family. Taking unnecessary risks is not the way to do it.
2. Buying a Property With Zero or Negative Cash Flow
The main point of buying real estate investment properties is to have some additional cash flow from it, so you can slowly build up your passive income and retire yourself and your partner. That’s the ultimate goal.
But if you keep on purchasing properties that look good on paper, but don’t have any cash flow associated with them, then you are essentially moving backward in this investing game. There’s no need to fall in love with a property and then make a bad decision because you think the cash flow situation might change in the future.
There are so many investment properties that you could potentially purchase that have great cash flow, so why would you spend any time or effort on properties that have zero or negative cash flow? It’s so unnecessary!
Do the math from the get-go. If the property has zero cash flow, then run in the opposite direction, and do not let anyone convince you otherwise.
3. Not Hiring a Property Manager and Trying to Do It All Yourself
The biggest reason you would want to buy investment properties is so that you can slowly build up to a future filled with freedom from the 9-5 and the rat race. You don’t want to work for the rest of your life for some corporation and you are buying real estate investments to get out of that hamster wheel.
But too many real estate investors make the mistake of not hiring a property management company to take care of all their properties. Perhaps you can take care of 5 or 6 properties on your own, but once you have more than that, you are going to see all your free time bleeding into property management efforts.
Stop doing that to yourself. Not only will your physical and mental health deteriorate if you do this, but all that time you could spend with family or friends is going to bleed away into nothingness.
As soon as you feel like you are overextending yourself, look into hiring a property manager right away. Do not dilly-dally about it. You will feel such a sense of relief when you don’t have to visit your properties in the middle of the night to fix a broken toilet or deal with cantankerous tenants.
4. Hiring the Wrong Property Managers and Bleeding Money
It’s also important to be discerning when hiring a property manager to take care of your properties. Don’t just hire the first person who applies for the job or one of your unqualified relatives (your aunt’s cousin’s sister isn’t experienced enough).
Spend the time working through resumes and applications to find the perfect property manager for your needs. There are many property managers available now, especially since real estate investment has blossomed in the past couple of decades.
If you take the time to hire the right person or company to take care of your properties, you will end up making more money in the long run, despite paying them a monthly fee. It will also relieve you of a lot of stress and anxiety, which in itself is worth their salary.
Too many real estate investors end up hiring property managers who don’t know what they are doing or who end up stealing from them and running off with a big chunk of the rent. Do not let this happen to you. Do your due diligence and find the right property manager for your needs.
5. Not Building a Good Team Around You
Another thing you will need to do from the get-go is to build a solid team of professionals and contractors. You want to have plumbers, electricians, locksmiths, and other experienced folks on your team. This way, no matter what happens with your rental properties, you will always know which person to contact to get it repaired.
Also, think of other professionals to add to the team, like bookkeepers, real estate agents, and more. The more experience you garner as a real estate investor, the more you will realize the importance of having a team of folks that you trust and that you know you can rely upon.
You don’t want to be calling locksmiths or plumbers in the middle of the night trying to find someone who can do an easy job for you. It’s much better if you have a contact that you can always call upon in case of emergencies or general maintenance.
Think about hiring a couple of folks who can assist you in managing the property managers and all the rest of your team. You don’t want to do it all on your own and have no time left over to enjoy the fruits of your labors.
6. Making Emotionally-Driven Decisions
Do you tend to get excited or enamored with a particular rental property and then purchase it without thinking about the consequences or any other relevant data points? Remember that real estate investing is a business and it should be treated as such.
Don’t just buy a property because your aunt’s friend recommended it or has been raving about it. You should always crunch the numbers and make your real estate buying decisions using logic and rationality.
As soon as you feel fear, greed, or any other emotion creeping into your decision-making process, you know it’s time for you to step away from the table and cool yourself down. It’s also a great idea to bring some partners into your business who are more rational than you, so they can balance your emotional side out.
In this manner, you can move to another property if the numbers on this property don’t pan out. Easy-peasy!
This only applies to rental properties, of course. If you are purchasing a home to live in, then of course emotions will play a role in it.
7. Not Negotiating Enough When Purchasing Properties
You are going to end up buying a lot of rental properties and getting approved for lots of rental loans.
The trick here is to make sure you don’t end up missing out on a great property because you waited too long or negotiated too hard. But, you also don’t want to get scared of losing out on a property and then not negotiating enough on it.
The lower the purchase price on your rental property, the lower your monthly mortgage rate will be. This will up the cash flow on your property. That’s why it’s important to ensure you find that sweet spot of negotiating hard enough and then knowing when to step back and agree to the offer.
Don’t worry if you aren’t good at this from the get-go. No one is, at first that is. As you purchase more real estate properties and get approved for more bridge loans, you will figure out how much negotiating is the perfect amount.
Finding that sweet spot will take time and effort. If you wish to hurry up the process, then learn from the experts in the field.
Take courses online from Masterclass or other avenues on negotiation, so you can build this very valuable skill.
8. Getting Bad Financing
There are many ways you can get creative financing options. But this will only be the case if you have contacts in the mortgage industry, or if you have done some research yourself.
Do not end up falling for bad financing options, because that’s going to eat away at any profits you might have and will result in you having to throw out the investment as a dud.
Make sure you aren’t paying higher interest rates than necessary. Speak to credit unions or other smaller financial institutions as they can sometimes have better interest rate offers. Or, find a mortgage broker that can help you find interest rates at places that you alone wouldn’t be able to search.
Also, ensure that you purchase a house that has a downpayment that you can afford. If you put down a downpayment that’s too small, you will have to pay mortgage insurance on it, which is another expense that eats away at your monthly rental income.
Shop around for the best financing. It might seem like a waste of time to do this, especially when you are busy with so many other details, but reducing your interest rate by even half a percentage point can result in thousands of dollars of savings over the lifetime of the rental property.
You could even find private lenders to make your rental life easier.
9. Not Performing a Rental Rate Analysis
No matter if you are renting out your properties to friends or relatives, or if you are finding strangers to become tenants on your property, the same thing applies. You will need to do a comparative analysis of all the similar rental properties in the area (same number of rooms, bathrooms, square footage, and more).
Once you do that, it should tell you exactly what other tenants are paying for a rental property similar to yours and this will help you price your rental property appropriately.
Of course, if you are having a hard time renting your property, for whatever reason, you can always price yourself $50 or $100 lower than the other rental properties, so you can get your property rented out quicker. And if you think you have a property with better amenities or offerings than other properties, you can choose to price it higher than the others.
Over time, as you become more experienced at pricing out rentals, you will not make mistakes with it. As iterated earlier, you always want to ensure you have a positive cash flow (and ROI) on your rental properties.
You are not running a charity here and you don’t want to jeopardize your business by pricing yourself too low. You might just price yourself out of the market permanently.
10. Estimate Ongoing Expenses Properly
Yes, it is hard to predict what your ongoing expenses will be, at first.
You are going to make a few mistakes with it, but ensure that you speak to other more experienced real estate investors or do your research to figure out what the right numbers would be.
Also, as you build your real estate portfolio, you are going to understand better what the expenses on a particular property would be, just based on your previous experience.
As a beginner, always overestimate your ongoing expenses, so you are not caught unaware. You don’t want to have to dip into your savings because you didn’t account for some major roof repair expense or a foundation problem.
Ensure you always keep cash reserves in the bank for any of these unexpected situations. Even if you feel you could be making more money by investing these cash reserves in the market, it’s better to keep them in cash and ready to take over in case of emergencies.
This way you can keep yourself from declaring bankruptcy or going into massive debt.
11. Don’t Skimp on Your Insurance Coverage
No one likes to talk about insurance, except insurance providers. It’s a confusing business, especially since as a beginner, you might end up either getting too much insurance or not enough.
As a real estate investor, always lean towards the side where you get more coverage than you think is necessary. This is because too many real estate investors don’t get enough insurance and end up facing major financial problems because of it.
The most important one you will need to focus on is liability insurance. You never know what might end up happening to your tenants while they are staying at your rental property.
They might slip and break a leg, or worse. If you have liability insurance, you can sleep at night knowing that you are protected no matter what.
Another personal insurance to have is disability insurance. What if you weren’t able to take care of your properties anymore because you broke a leg or you became really ill?
It’s important to cover yourself in such cases, so your business doesn’t suffer because of your illness.
Also, certain insurances will pay your mortgage while you are sick or disabled, so that can definitely be a good one to add to the mix, especially if you don’t have anyone else who can take care of your real estate investment business while you are out of commission.
12. Invest Based on Cash Flow Not Appreciation
It’s easy to believe that the real estate market will keep on going up and up forever. However, there are always dips and lulls in the market, especially since the world is becoming more chaotic as time goes on.
You cannot rely on appreciating markets to keep appreciating forever, but you can rely upon your steady cash flow. This is even more true if you have a fat positive cash flow.
Always find properties that are in good neighborhoods where it will be easy to find good tenants who will pay on time every month. This way you can always rely on your cash flow to remain steady.
You won’t have to worry then if the real estate market crashes or if it goes up. You will keep your eye on the prize which is your positive cash flow.
13. Not Getting an Inspection and Appraisal Report
You don’t want to skimp on these reports. It’s easy to ‘trust’ the person who’s selling you the property and believe that everything is perfect in the homes you purchase.
But that can come to bite you in the butt quite quickly. That’s why you will regret not getting these reports before purchasing.
It’s an added expense, but it’s well worth it if you take into account that you can’t see foundation problems or structural problems by merely looking at a property. An inspection report can help you avoid a purchase mistake that could ruin your business.
Also, doing an appraisal report will give you a solid idea of what the property is worth and how much you should pay for it.
Both of these scenarios encourage you to spend a chunk of time before buying a property doing your due diligence. There’s no point rushing into such important decisions without doing the necessary research.
The more successful you want to be as a real estate investor, the more of this due diligence you will need to do.
14. Expect Vacancies but Work to Avoid Them
When you are planning out your taxes and profits for the year, account for certain vacancies in your properties. This is because tenants are constantly moving about and you never know when you might end up with a lull in tenant applications.
Of course, you will want to do everything you can to rent your properties out right away after a tenant leaves. This means doing lots of marketing, getting real estate agents on board, and giving discounts or incentives to new tenants.
You don’t want your rental properties to stay empty for too long, because that means that you are paying for the mortgage and other expenses out of pocket. That can drain your finances quite quickly.
If you need to reduce your rent by quite a bit for a few months to entice tenants, take the chance and do that. You can always increase your rent later (based on state laws), once the market stabilizes.
Do Not Ignore These Real Estate Investment Tips
As a beginner real estate investor, you have a lot of learning to do. It’s understandable since real estate investing isn’t something that’s taught in schools or universities.
Follow the real estate investment tips shared above when you first start. The more experienced you become, the more you will form your own options on how to run your rental property business best.
If you need a loan for a rental property, then contact LendSimpli today!