4 Mistakes You Don’t Want to Make When Purchasing a Rental Property

A couple extending hand to get keys for their new rental property.

Mistakes You Don’t Want to Make When Purchasing a Rental Property

When speaking with the world’s wealthiest people, the majority will tell you that investing in real estate is the best thing they ever did. You can enjoy immediate returns by purchasing a rental property with multiple potential revenue streams.

However, successfully profiting from a rental property isn’t as easy as you might think. First-time investors often make serious mistakes with their first property that end their investing career before it’s begun.

“Roughly two out of every ten Americans will purchase an investment property. Half of them will be up for sale again sometime within the next five years. Simply because the owners couldn’t generate enough profit out of the property to make it worth their trouble,” warns an article about common mistakes made when purchasing an investment property in Houston.

You can avoid going through this all-too-common scenario by learning from those who have gone before. Here are a few things you don’t want to do when purchasing your first rental property.

1. Buying Blindly

Popular television shows about real estate investing make it look incredibly simple to invest in real estate. However, it’s a complex process that requires careful research and an understanding of the market.

“It’s all about obtaining knowledge,” Ray Rodriguez, mortgage sales manager for TD Bank told U.S. News. “You have to do some very good due diligence.”

Along with subscribing to blogs and reading books on investing, he recommends speaking with mortgage brokers, realtors, and investors. Ones who have been through the income property process. They’ll provide insights into things like appropriate rent prices for your location. Even tips for being a landlord, finding great deals on rental properties, and financing.

2. Forgetting the Property Taxes

While you’ll eventually pay off the mortgage, the property tax will never disappear. In many counties, property tax caps on rental properties are higher than those on your primary residence. Plus they can go up without warning.

“I’ll never forget the day I opened our property tax bill for our first rental and realized that our property taxes had gone up 300 percent overnight,” Holly Johnson, a property investor in Indiana wrote in a Simple Dollar article.

Johnson had been banking on property taxes based on the last owner’s mortgage and hadn’t factored in the increase.

“Fortunately, we were able to readjust the rent and raise it to take the higher property taxes into account once the first year’s rental lease came to an end. Lesson learned there, but it was definitely learned the hard way,” Johnson concludes.

Beware of high property taxes and potential increases when evaluating which property to purchase. If you’re not careful, taxes can eat all of your profits and then some.

3. Ignoring the Inspection

Most mortgage lenders insist on a home inspection before they’ll lend you the money. They must ensure their money is put to good use and that repairing problems within the home won’t make it difficult for you to make your mortgage payment each month.

Having your home inspected for potential problems is not simply a formality. Hire a professional, even if it sets you back a few hundred dollars. Get your money’s worth out of this inspection and ask as many questions as possible to learn all you can about the property.

“Accompany a property inspector as this opportunity offers you a platform to raise any concerns about the fitness and condition of the property you are considering buying,” says an article from Mashvisor. “In fact, being meticulous can call the inspector’s attention to certain elements that would ultimately save you a lot of money.”

Once the inspection comes back, don’t ignore what it says. If the inspector notes major problems with big-ticket items like the roof, siding, windows, HVAC system, or plumbing, think twice about making the investment.

4. Don’t Overlook the Power of Rental Income

It’s easy to get caught up in the many revenue streams of your investment property – that’s one of the benefits of owning real estate. You might look at a property and see updates that will raise the value or even a potential house flip. It seems like a quick way to make money, but in most cases, updates are not as simple or effective as relying on rental income to make ends meet.

“Don’t lose sight of the real money maker — rental income,” warns Jay Jenkins of The Motley Fool. “You’re not buying this rental property to flip or speculate on rising prices. You’re buying it because a tenant is willing to pay cold, hard cash for the right to live in this house. Cash flow is truly king.”

There will be overhead expenses to consider, like your mortgage, property taxes, homeowners insurance, repairs and maintenance, utilities, and other expenses of homeownership. The only sure way to generate cash flow is through rental income.

With rental properties in such high demand right now, a profitable real estate investment is within reach.

Have you ever considered investing in a rental property?

Let me know, til then–cheers m’deres!

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