How To Eliminate Risk in Real Estate Investment

Avoid 18 Common Mistakes Made by Investors and Ensure High Rates of Return

 

  1. Failure To Determine Your Time Need

    • Cash flow, capital appreciation, tax benefits, loss of management, equity pay down and price of ownership are just some of the things that need to be addressed before you make an investment.  A service minded real estate professional can be a tremendous asset by taking the time to evaluate your needs and making sure you've got all your bases covered.

  2. Not checking out the seller or seller's agents numbers

    • Claims of extremely high rates of return run rampant in real estate investment.  Don't get caught up in the excitement! Check everything: rents, payment history, taxes, expenses, deposits, future modifications... everything.  Make sure you have the right agent.  It's like having a good insurance policy against overlooking all the seemingly insignificant but very important details.
  3. Forgetting you are buying a business

    • Owning investment property carries with it great potential for creating wealth and also some potentially difficult decisions.  Evictions, re-investment into the property, time management all need careful consideration.  Remember, this is not a "hands off" business.
  4. Avoid negative cash flow

    • Property that eats cash every month can drain your working capital.  This can create stress, frustration and become quite painful.  Predicting constant appreciation is extremely difficult if not impossible for the unseasoned investor.  A strain on your cash flow may cause you to sell the investment before the benefits of ownership are ever realized.
  5. Failure to do a thorough inspection

    • Look under every rock!  Hire a professional inspector.  Ask the tenants about pest problems, structural damage or recurring problems.  Don't overlook anything!  A value driven real estate professional will help you find the right inspector and can help you avoid costly mistakes.  When investing your hard earned money be sure to use sound business judgement.
  6. Failure to get adequate insurance

    • Investment property brings liability.  Tenants, cars, parking lots, cleaning facilities, property liability -- the list is quite extensive.  Adequate insurance coverage is an absolute must!  Be sure to consult with an insurance professional and protect hard earned assets.
  7. Inspect, approve and confirm all documents

    • The list of documents that need to be proofed can be overwhelming to the first time investor.  Building permits, zoning laws, rental and lease applications, health licenses, laundry leases, underlying loan document, by-laws, title policies, inspection reports, purchase contracts, leases (make sure the tenant has the same version the seller gives you), disclosures, insurance, etc.  Don't do it alone.  The right professional can remove most of the stress and bring the transaction to a conclusion smoothly.
  8. Get a bill of sale for all property involved

    • Many types of personal property including appliances, furniture, and fixtures can be involved in an investment sale.  Be sure that all of this is detailed in the purchase contract and ask for all the warranties.
  9. Charge fair rents

    • Vacancies, turnovers and lease terminators are your biggest expenses.  Charge fair rents, treat your tenants with respect and respond as quickly as possible to their questions and requests.
  10. Select qualified, good tenants from the start

    • Take the time to check references, previous Landlords, employers, financial references, credit, crime history.  A little work up front can save tremendous problems later on down the line. There are service companies that will do this research for you and it is not expensive.  Require the research fee with the application and refund it when they pay their security deposit. The potential tenants with problems won't apply and you can weed them out ahead of time.
  11. Consider a property manager

    • Use your time doing things you know how to do and are good at.  You may want to delegate the property management to someone who does it professionally.  Here is one of the myths:  All property managers are scum bags who don't do what you pay them for and eat up your profit.  In my experience, property management allows me to have a life and build wealth.  It costs a little, but it takes the worry off my shoulders and allows me the time to go out and look for more good properties to buy.  It's a "spend a little and make more in the long run" issue.  Who wants to go on vacation and deal with a water leak while you are away?  Worrying about managing property is why people don't want investment property.
  12. Confirm the appliances listed in the purchase contract

    • Often purchase contracts contain appliances and other personal property that will be conveyed with the real estate.  Check this out with the tenants also.  Make sure that the tenants don't  own the appliances.
  13. Laundry issues

    • In most multi-family apartment buildings, the owner provides the washers and dryers but occasionally tenants will ask to use their own washers and dryers.  If there are multiple washers and dryers in the basement, check to make sure they don't belong to the tenants.  If the tenant is using their own washer/dryer, they would need to have an outlet for these appliances run from their breaker box.  However, they are still using your water.  Not only this, other tenants may use their washer and dryer, their friends could also, and before you know it, not only are you not getting little income from the washer and dryer, you are actually financing their private laudromat.
  14. Failure to Maintain the property quickly

    • When the tenants call with maintenance issues, respond quickly. This is such an important issue in management and occupancy rates. If tenants can't get maintenance issues taken care of quickly and efficiently, they will leave.  Not only that, if they see that you don't want to take care of the property, they won't either.

  15. Animals are OK and can be profitable

    • Don't be too quick to turn away animals.  Under certain circumstances they can net you a lot of money.  Cover yourself so the tenant agrees to have a bark collor for their dog if necessary.  Take a large non-refundable security deposit just for the dog and be specific about cleaning up after animals.

  16. Smokers often cause more problems than animals

    • Insist on an air purifier if you are going to allow smokers.  They either spend the money to buy the purifier, or you rent one to them.  The problem with smoking is that when the tenant leaves, you have to completely repaint the entire apartment, trim and ceiling as well and replace any carpet.  The turnover costs are much higher, and it is very hard to rent the property prior to the tenant moving out because only smokers will sign the lease. Other people are turned off by the smoke smell and don't trust that it will be gone by the time they move in.  So you lose occupancy time too.

  17. Leverage unused space

    • Basement space can be used for laundry and storage facilities.  Most tenants expect that they will get a small amount of storage space. However, you can often create much larger storage facilities that can turn out to be a gold mine, not just for your current tenants either.

  18. Don't spend positive cash flow

    • Cash flow should be used for wealth building.  Either save it up for the downpayment on the next property or use it to pay down the mortgage.  Our strategy is to buy more buildings and concentrate on accumulating money for retirement, or college educations for children later on. If you need cash, you can always sell a property.  In the meantime, your tenants are paying off your mortgage and you have some tax advantages.

If you are still interested in the idea of property investment, call us. We can help you buy the right property and we can help you manage it too.  Sometimes our investors just want us to lease their properties, sometimes they want us to completely manage them.  Sometimes, they just need a little coaching, we're up for that too.  Call us at 513.766.3878 or 513.766.9200 and ask for Carol or Vicky!

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