It’s the perfect time for a new person to start out in investment real estate. Home prices are low. It’s a buyers market.
At the same time, mortgage rates are at a new low. And there’s a shortage of rental homes, driving rents higher.
But there are a few pitfalls to watch for. You could lose money even in this very favorable market.
1. Wrong Tenant
The wrong tenant can seriously cost you. He can tie you up in court for a couple years while he pays no rent. You are forced to spend money on lawyers. Meanwhile he is deliberately damaging the house, suing you, and stealing appliances and copper pipes on the way out.
You need to seriously screen prospective renters. And then avoid trouble by having him sign a proper rental agreement.
2. Wrong House
The cheapest house may in the long run be the most expensive. The months you spend making repairs are months you are collecting no rent.
Be very careful about the condition of the house. Hiring a professional home inspector is the best idea.
A house in a bad area will not attract good renters. If you don’t want to live there, they won’t either. Vacancies will be longer. When you rent to a person who is comfortable there, you may encounter activities in your house that you never considered.
3. Not Running Your Rental Like a Business
Your rental property is a business. In order to make a profit, you need to run it with a sharp pencil. Keep the money in a separate bank account and pay expenses from there. Use a good book-keeping system and use a tax professional.
Keep a record of everything for legal reasons and for taxes. Even keep pictures of the property condition before occupancy. Keep every receipt and also a record of any walk through inspection you make.
4. Wrong Insurance
Besides property and replacement costs, you need liability insurance. You can also insure against property damage, loss of rent, and legal expenses.
5. Not Educating Yourself
Absolutely, “Sharpen Your Saw”. Read books. Join rental associations. Talk to other landlords.
Rental laws and tax laws keep changing. Know the regulations for your state and local area. Not knowing the law could slow evictions. Or it could cause liabilities.
Following these cautions could save you thousands of dollars. Or you could be prevented from making a mistake that could wipe out your new business.