Have you ever made a mistake when analyzing a rental property that ended up costing you a lot of money?
Or are you just starting out in real estate investment and you want to make the best returns you can?
Either way, you probably already know rental properties are a great investment option to generate passive income or as a source of your primary income.
According to Forbes, they are one of the best investment options available to you today.
However, what you envisioned as a source of income can become a source of pain if the investment goes south.
Common Mistakes Made When Analyzing Rental Properties
There are many reasons why investing in a rental property can lead to losses, and these are twelve of the biggest mistakes investors make when analyzing rental properties.
1. Inadequate Research
Research and then more research is the first step in analyzing rental properties. The type of questions you ask is necessary because they will determine if a particular house is the right fit for you.
Some questions to consider asking are:
- What are the key features and amenities near the property you are considering?
- Is it in a construction area, or are there planned constructions nearby projected to start soon?
- What is the condition of the property, and how much refurbishment or renovation work is needed?
- What is the neighborhood like?
- Is the area affected by natural weather patterns such as pest issues or floods?
- Are there any plans to change the area, for example, gentrify the neighborhood?
Visit the property and walk around the area and talk to people to get a clear picture of the property you plan to buy.
Get professionals to inspect the building before buying to ensure that you get realistic estimates of the work that needs to go into it.
2. Not Learning About Real Estate Investing
Investing in rental properties is complicated because there are many different details to it. There are multiple regulations that must be adhered to.
It may not be possible to get all the knowledge you need in the beginning, but you should understand what it entails to invest in a rental property.
It will enable you to be aware of the various activities you will go through during the investment process. You will also be ready for the next steps that you may need to take as you proceed.
3. Not Considering All Costs
Beyond the cost of purchasing the property, there are other costs such as property taxes, repairing or upgrading the rental property, and maintenance costs.
Additional costs to consider are insurance and the cost of maintaining the property when it is vacant.
Once you have considered all these costs versus what you shall make, you can analyze different real estate investment deals. This analysis will give you a clear picture if it is a profitable investment.
For instance, a factor to consider is that property taxes are higher in metropolitan areas than rural areas, and these taxes can reduce your profit margin.
4. Failing To Calculate the Return On Investment Correctly
When you invest in a property, the aim is to earn back the money you have put in and make a profit. People make the mistake of being overly optimistic about the expected appreciation of a property without considering that it may not appreciate during that time you wish.
Base your expected income on the current rental revenues to get a realistic picture.
This will enable you to plan correctly based on realistic features.
5. Not Seeking Professional Advice
To have a successful rental property investment, you need to work with professionals who will advise you on being profitable and remain so.
Some professionals to have in your team are:
- Real Estate Agents
They provide professional insights on the rates to charge for your rental property depending on the market, your property type, either commercial or residential and the location of your rental property.
- Property Manager
A manager will handle all tenant matters, including property advertisement, tenant screening, and evictions where necessary. Having a property manager is a great option, especially if you do not have the time to do the day-to-day management of the property.
A knowledgeable attorney will handle legal paperwork that is associated with owning a property. They will also help draft tenant agreements to protect you from liabilities and also advise on your legal obligations as a real estate investor.
A professional contractor will know how to assess a property and advise what work needs to be done and the best way to do it. A good contractor will also ensure that you pass all required inspections so that your rental property is ready for occupancy.
6. Investing Without Thinking Long Term
When analyzing a rental property you need to know if you want to invest short-term or long-term. Many investors make the mistake of not thinking of a long-term strategy, so they get disappointed when the rental property doesn’t give the expected return immediately.
One thing to consider is to invest in a property with good growth prospects, which will increase your equity. Properties with good growth prospects can help you acquire other properties in the future.
7. Buying Emotionally Only
Purchasing a rental property can be an emotional decision or one influenced by your gut. However, this should not be the only deciding factor. Look at it from a business point of view and decide whether you can make money out of your investment.
Do not allow your feelings or the emotions the property evokes in you. For instance, buying a property in an area you grew up may be an emotional decision because it is based from a sentimental view.
To avoid making a wrong business decision, you must consider whether it will give you a good return in the time frame you have. However much you would want to invest in it, if it is not a good business decision, do not.
8. Making Decisions Hastily
Sometimes when you see a property that looks like a profitable deal, it can make you rush to buy it. It is better to check if other options may offer a better deal.
Take time to research and reach out to other professionals and find out if you are getting the best deal possible. It is essential to analyze real estate investment deals from different real estate agents and decide what suits you best, rather than rushing to take the first deal that comes along.
9. Investing In A Rental Property That You Cannot Afford
When you decide to invest in rental properties, you will have money for that intention. People make a mistake paying more than they intended because they feel the deal is too good to pass up
Consider all other costs that you will factor in apart from the purchase price. If it is too strenuous for you to manage, then leave that investment option alone.
Think long-term so that you will be able to afford pricier investments as you build your portfolio with time.
10. Risky Financing
One of the mistakes investors make is to get financing that is inflexible or getting terms that do not favor you. Suitable financing is flexible so that even if your projected plans don’t work out the way you envisioned, you can still make your payments.
Also, have a backup plan in case your financing goes south. It is key to analyze real estate investment deals hinged on the financing choices you have to reduce the risk of making losses on your investment.
11. Lack Of An Exit Plan
Sometimes even with the best plans and due diligence, an investment property may not work out the way you expected. It is essential to have an exit plan in case of this scenario.
If it happens, rethink your strategy. For example, a situation that may cause you to have an exit plan is when you renovate, and the rental income will not cover the money you have put in. You may decide to sell.
You must know how to analyze rental properties every step of the way to ensure that you are on track to be profitable. A thorough analysis will reduce the chances of having an exit plan.
12. Not Taking Into Consideration Tenants’ Needs
One of the best ways to ensure that you get tenants quickly is to ensure your property meets the needs of your intended renters. It is essential to know who your intended renters will be, then consider what they are likely to need and what improvements you can add.
Some improvements may be:
- Upgrade the kitchen and kitchen appliances.
- Do you need to improve the house’s aesthetics to make it look more modern, e.g., painting with fresh colors?
- Are the appliances working well and modern?
- Do you need to work on the exterior of the property
- What landscaping will you need to do?
When you can cater to the needs of your intended tenants, you are likely to find tenants fast, and you can charge rent that will bring you a good return.
My Final Thoughts on Mistakes Investors make when Analyzing Rental Properties
Avoiding these mistakes investors make when analyzing rental properties will help you pick better investment options. With more knowledge, you can make better-investing decisions which will increase your chances of being successful.
I would love to hear from you now.
So, do you have any thoughts on the mistakes made by investors when they analyze investment properties? Have you made any mistakes or got any interesting experiences?
Please add them to the comments below I would love to read about them. Thank you and have amazing day.