Mistake 1: Confusing a cheap deal for a good deal.
It is true that you can buy some homes for ridiculously low prices — but that doesn’t mean you can rent them out. Homes in deserted subdivisions aren’t any more appealing to renters than they are to buyers. The same is true for less attractive properties or those in less desirable school districts.
Mistake 2: Overlooking key costs.
Knowing the potential rent isn’t enough. Before you buy a property, you should also factor in closing costs of 3% to 6%, the costs to fix up the place and maintain it, and your holding costs. Then add the profit you expect to make — and more closing costs, if you intend to turn around and sell it. Only then can you figure out what you can afford to pay.
Mistake 3: Forgetting that time is money.
In real estate, “time is your biggest enemy,” says David Hicks, co-president of HomeVestors of America, a franchiser whose motto is “We Buy Ugly Houses.” You lose money when your property is empty, whether you are painting it or are between tenants. You also lose if you buy in the fall and can’t replace the roof until spring. You may be better off accepting a lower rent than waiting for a higher-paying tenant.
Mistake 4: Assuming you will sit back and watch the rent roll in.
Just like homeowners who can’t pay the mortgage, tenants lose their jobs and stop paying the rent. Evicting them can take several weeks, and some steal appliances or other property. You will need to screen prospective tenants carefully, or pay someone to do it for you.
Mistake 5: Underestimating repair costs.
As with all homes, you will be making lots of repairs. You may find wood rot or mold when you remove that cracked bathtub. Carpet in rental homes typically must be replaced every five years, and you may have to repaint after every tenant. Tony A. Drost, president of the National Association of Residential Property Managers (NARPM), suggests setting aside six months of expenses so that you will have money if a major repair is needed.
Mistake 6: Assuming that owning a rental is the same as owning a home.
You might put up with flaws that a renter wouldn’t tolerate. In addition, many states and communities have strict and complex laws for landlords, even if you own only one property. A property manager can handle most of the headaches, but you should expect to pay one up to a month of rent for finding and screening tenants — and up to 10% of the monthly rent for management fees.
“By Karen Blumenthal of The Wall Street Journal”