There’s little wonder as to why rental property ownership is considered such a profitable venture. Obtaining a well-maintained property in an area with ample demand for housing can pave the way for heavily bolstered finances.
However, this doesn’t mean that purchasing your first rental property is going to be a walk in the park, and there are a variety of rookie mistakes that can turn your first property investment into a financial nightmare. Anyone looking to invest in a rental would do well to stay mindful of the following problems.
Failing to Study Up on the Location
Before investing in a rental property, you’d be wise to study up on its location. Given how important location is to any type of real estate investment, you’re doing yourself – and your finances – a great disservice by failing to research the locale of your first rental.
For example, even if you invest in a property that’s laden with amenities and meticulously-maintained, you’re unlikely to see the desired returns if its location features very little in terms of housing demand. As any seasoned investor can attest, an amenity-light property in a heavy-demand area is often a safer investment than an amenity-rich property in an area where demand is on the wane.
So, before proceeding to acquire your first rental property, make sure to do your homework. Among other things, this will entail looking into local property values and rent prices, as this will help prevent you from overpaying for a property and give you a good idea of how much rental income you can expect the property to generate. To make sure you don’t miss anything, you can use the handy calculator provided by Simon Conn, or something similar.
You’ll also need to do some research into population, growth rates and the local economy – which will help educate you on how much demand exists within the area. It’s also a good idea to calculate the cap rate in real estate investments – i.e., dividing the net operating income from a property’s asset value.
Underestimating How Much Work a Property Requires
Many of the rentals you come across are going to need some degree of work. However, there’s a big difference between a property that requires minor repairs and one that needs major renovations.
As such, it’s strongly recommended that you have every prospective investment property professionally inspected. This will ensure that you’re fully aware of any outstanding issues with the property, which will enable you to make an informed decision and adjust any outstanding offers accordingly.
Once the results of the inspections are in, it’s recommended that you seek out estimates from assorted contractors for any repairs/renovations inspectors have deemed necessary.
Should the cost of this work far exceed the returns you expect a property to generate, consider requesting a significant reduction in asking price or simply walking away from the deal altogether.
As a buyer, you have nothing to lose and much to gain from making a prepurchase inspection a prerequisite for buying a property. So, no matter how much a seller pushes back against inspections, make it clear that you cannot be swayed on the matter.
Failing to Properly Screen Prospective Renters
Tenants who don’t keep up with rent are among the biggest impediments to the profitability of a rental property. Although there’s no magic wand solution for discerning good rental applicants from bad ones, a good screening process can go a long way in ensuring that you don’t get stuck with tenants who are unable or unwilling to pay rent.
For one thing, you’ll need to confirm that every applicant has sufficient income to comfortably afford rent. This entails requesting proof of employment and getting in touch with employers. Additionally, with each applicant’s permission, you should have a look at their credit score. While most applicants aren’t going to have flawless credit, you should think twice before taking a chance on someone who’s swimming in outstanding debt.
Getting ahold of an amenity-rich rental property in an area with abundant housing demand can be a long-term boon to your finances. Still, this isn’t to say that rental properties represent risk-free investments.
In fact, even properties that seem like surefire moneymakers come with a fair number of risks. So, if you’re preparing to invest in your first rental property, be aware that you’re likely to face some challenges. Fortunately, by prepping for the problems outlined above, you can prevent yourself from becoming overwhelmed by unpleasant surprises.