These books present real estate as a passive income source where all you do is finance a portfolio of rental properties and wait for the tenants to pay off your mortgage. The truth is that renting single-family houses is about as far from passive income as you can get. I had five properties at the peak of my real estate empire, four single-family houses and one duplex.
From finding tenants to maintenance and management, I was working at least 20 hours a week on top of my full-time job. Even after a tenant moved out, it would be a month or two before I spent the week necessary to clean up the house and get it back on the market. That gives you some financial flexibility and helps you understand if the cash flow will be enough to cover expenses. As I started neglecting my rentals, my vacancy rate increased well beyond what I had estimated.
With six rentals, I almost always had at least one vacant in any given month. That meant pulling money out of savings and other investments to keep up the mortgages. I started selling my properties in but the damage was already done. I had spent through most of my savings and could only sell a few properties for the mortgage value when the housing bubble burst.
I was broke and my dream of being the next real estate mogul was being foreclosed. Some of these traps can be avoided with a little planning, others will take more diligence. All will help you produce a consistent and mostly hassle-free return for decades. Consider joining or starting a real estate investment group of investors, contractors, property managers and real estate lawyers. Some groups pool their money formally, but the easiest route is just to exchange ideas and help each other out with services.
Start slow with your real estate empire. Buy no more than a couple of properties your first couple of years to ease yourself into the time required to manage rentals. Consider buying a tri-plex or four-plex instead of single-family properties. Be extremely conservative when estimating your costs before you buy a property.
Research vacancy and rental rates for the neighborhood. Talk to other investors about costs for hiring out maintenance and management. Only buy houses and in neighborhoods in which you would want to live. Financing can be your friend in real estate investing and help boost returns but it will also increase your monthly expenses and leave you scrambling to make payments.
It also helps to know some of the classic mistakes that others make when they start investing in property, to help you avoid making them as well. Key Takeaways People who are new to real estate investing tend to make several classic mistakes. Be sure to do your due diligence on the neighborhood and on the specific property that you intend to buy.
Assemble a team of professionals, such as a real estate agent, an attorney, and a handyman, to help you succeed. Failing to Make a Plan The first thing to do is make a plan. The last thing you want to do is buy a house without knowing how it will generate income or gains.
But you must take a step back and plan accordingly, including what to do if the market sours or your assumptions were wrong. Before getting a mortgage or plunking down cash, you need to decide on an investment strategy. What type of house are you looking for? For example, are you looking for a single-family or multifamily property? Vacation rentals? Mixed-use, commercial, or office buildings? Figure out your purchase plan, then look for properties that fit that plan.
Skimping on Research Before buying a car or a television set, most people compare different models, ask a lot of questions, and try to determine whether the purchase they are considering is worth the money. The due diligence that goes into purchasing a house should be even more rigorous. There are also research considerations for each type of real estate investor—whether a personal homeowner, a future landlord , a flipper , or a land developer.
You should ask a lot of questions about not only the property but also the area neighborhood in which it is located. After all, what good is a nice home if just around the corner is a college frat house known for its all-night keg parties? The following is a list of questions that would-be investors should ask regarding properties they are considering: Is the property near a commercial site, or will major construction occur soon?
Has the area changed, or is it expected to see major changes in terms of demographics or household types? Is the property located in a flood zone or a problematic area, such as ones known for radon or termite problems? Does the house have foundation or permit issues that will need to be addressed? What major things in the house will need to be replaced e.
What is the key reason why the house is being sold? How much did the previous owners pay for the home, and when? If you are moving into a new town, are there any problem areas in town? What is the proximity to key necessities, such as grocery stores, hospitals, and major employers? Doing Everything on Your Own Many buyers think that they either know it all or can close a real estate transaction on their own.
While you might have completed several deals in the past that went well, the process may not go as smoothly in a down market—and there is no one you can turn to if you want to fix an unfavorable real estate deal. Real estate investors should tap every possible resource and befriend experts who can help them make the right purchase.
At a minimum, a list of potential experts should include a savvy real estate agent , a competent home inspector , a handyman, a good attorney, and an insurance representative. Such experts should be able to alert the investor to any flaws in the home or neighborhood. Or, in the case of an attorney, they may be able to warn you of any defects in the title or easements that could come back to haunt you down the line. Forgetting Real Estate Is Local You need to learn about the local market to make purchase decisions that are likely to help you turn a profit.
That means drilling down on land values, home values, levels of inventory, supply and demand issues , and more. Developing a feel for these parameters will help you decide whether or not to buy a particular property. Families will want low crime rates and good schools, while singles may be looking for mass transit access and nearby nightlife.
If your planned purchase will be a vacation rental, how near is it to the beach or other local attractions? Try to match your investment to the kinds of tenants most likely to rent in that area. Getting Poor Financing There are still a large number of exotic mortgage options, where the purpose of these mortgages is to allow buyers to get into certain homes that they might not otherwise have been able to afford using a more conventional, year mortgage agreement.
Unfortunately, many buyers who secure adjustable-rate mortgages ARMs or interest-only loans eventually pay the price when interest rates rise. Make sure that you have the financial flexibility to make the payments if rates go up or a backup plan to convert to a more conventional fixed-rate mortgage down the line.
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