Thinking about buying rental properties, or have past purchases not performed as well as you hoped? Here are the five most common rental purchase mistakes investors make when buying rentals. Avoiding them could help improve your investment experience.
Location is just as important when buying rental properties as it is for buying our own home, perhaps more important because we have to sell the location to potential tenants. Some rental buyers make the mistake of looking in bad locations just because the sale prices are lower. The best approach is to look in good areas regardless of asking prices, then negotiate a good purchase price.
Too many investors skimp on inspections or they are bedazzled by fresh paint and staging. They often fail to:
- Inspect everything: general, roof, electrical, plumbing, HVAC, irrigation.
- General design: determine if the property is designed for use as a rental with low cost landscape maintenance and rugged floors, window coverings, fixtures, etc.?
- Request all structural maintenance records.
- Request maintenance records for included appliances.
- Forecast potential major repair expenses.
Properties don’t have to be perfect, but knowing their true condition and potential costs to repair is valuable information during negotiations. Especially with older properties, accurately predicting future repair expenses is also important.
3. Competitive Position
Tenants expect certain features and amenities for the amount of rent they pay, such as price per bedroom, parking, pool, gym and club house. Even if the property being purchased offers cheaper rent, filling vacancies could be difficult if features are not competitive with those offered by other properties in the area.
4. Projected Return On Investment
Most investors run a basic set of numbers before buying rental properties, but the numbers are not always accurate. Operating costs provided by the seller should be verified and reflect how the buyer will manage the property. Major repairs and capital expenses should be included in financial projections.
5. Exit Strategy
Buy low, sell high is common investment advice that applies just as much to rental properties as stocks. While we might plan to keep a rental property as long as it provides positive cash flow, we should also identify conditions under which we might want to sell, either through a straight sale or 1031 exchange. Here are a few exit considerations.
End Of Economic Life: A property reaches the end of its economic life when return on investment falls below our target. In rental properties, this is often caused by escalating maintenance costs as the building ages. Selling the property before it reaches the end of its economic life ensures you will find a buyer and sell at a reasonable price.
Market Conditions: Many market factors are local, such as demand, competition and market rents. Researching current conditions thoroughly and knowing when market conditions are declining can tell us whether we should consider moving equity to more profitable markets – or buy the property in the first place.
New Opportunities: Real estate equity has limited mobility, but real estate investors should always be open to moving their equity to better markets and better properties. Sometimes the opportunity isn’t just changing markets, it could be moving up to a more profitable property, such as when we sell three single family homes and use the equity to purchase a ten unit apartment building that produces thirty percent more net income.
Don’t make these mistakes! Whether you’re buying the first property in your portfolio or the 100th, working with a qualified broker can help you find and buy the right rental properties. Happy investing!