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March 19, 2013

Five Killer Mistakes that New Real Estate Investors Make

Last time we spoke about the kind of property that a novice real estate investor might want to purchase for his/her retirement fund. A conservative rental, single or multi-family, was offered as a good option because of the cash flow that it generates. However, not all rental properties are created equal. Here are 5 common mistakes that new investors make when deciding upon a property.

1. Underestimating Rehab Costs

No matter how nice the property looks, there are always a few improvements that have to be made before the property is renter ready. These could be as straightforward as a paint job and getting rid of some of the shabbier carpets, or they could be as involved as replacing the plumbing and wiring. Whatever the repairs involve, they’re going to cost money, and probably more than expected. Don’t go into a deal relying on a rough personal guesstimate of the repairs that are needed. Get official estimates from a few contractors, and have them include materials cost from one of the big box stores. These estimates are essential in determining the real asking price for the property.

2. Viewing the Property During the Day

Even if you trust the agent showing you the property, it still pays to do your own research. A house that looks great during the day might have a very different feel at night. Some neighborhoods are suited for families, while others cater more to a party element. Consider carefully if you’ll be able to find an appropriate tenant for the specific property.

3. Assuming That Everything is Legal

A multifamily can be a great source of income, and it’s hard not to start doing the quick mental arithmetic of 2,3, or even 4 tenants’ worth of rent. However, before you run the numbers, make sure that the promised number of units is a legal reality. Some property owners try to maximize rental income by adding illegal units in the form of converted attics or shoddy subdivisions. Giveaways include the wrong number of electric boxes, not enough exits for each unit, and all the units sharing one address.

4. Using the Wrong Sales Figures for Price Determination

If you want to get a sense of price for properties in a specific area, where would you look? A common method is to flip open the real estate section, and see how similar properties are being listed. Common, but wrong. What you really need to do is access the figures from recent home sales. This will give you a much better picture of the price that you could actually get. And when you look at the sales’ figures, make sure that you’re focusing on near identical properties. You’d be surprised at the differences that can exist even within the same neighborhood, and just how much those differences can impact price.

5. Assuming Being a Landlord is Easy

Managing a property involves more than just depositing the rent check. Standard inevitable repairs require assessing the problem, calling up the appropriate professional, and making sure that the work is done in a timely fashion. Neighbor issues (between your tenants and others) can also pose a time consuming problem. Even collecting the rent can turn into a mini-nightmare if you find yourself with recalcitrant tenants. There are solutions to these problems, but you can’t get to the solutions without knowing the questions. In almost any area of investing, education is key. Read up, find a mentor, and start investing your way to real estate success.

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