What mistakes do most people make when buying their first rental?

Question

What mistakes do most people make when they buy their first rental property. How should I get started?

Jim K. · Answer

I can't speak to all deals and property classes. I have C/D borderline SFR rentals. I know cheap, old crapstacks in bad neighborhoods. Here are four big mistakes that I've seen in this property class:

The stupidest thing you can possibly do when buying an aforementioned crapstack is focus on the numbers of the deal and largely ignore the nature and condition of the house you're buying. If you're going to buy a cheap, old house that's falling apart, you need to know something about crapstacks and how to fix them. But many newbies have the faith of a priest in Christ in the report they get from a housing inspector, often a housing inspector that the realtor selling them the crapstack recommends.

The second stupidest thing, and it's linked to the first thing, is to go after cheap, old SFR in bad condition and believe that you don't need to have proven contractors and handymen on your team to turn a crapstack into a wonderful BRRRR opportunity. The magnitude of this folly is compounded when you're buying crapstacks many states over for what you think are wonderful prices. You will be eaten alive by holding and fixing costs, delays, and change orders.

Third stupidest thing is for long-distance investors is buying crapstacks without a property manager in place and hoping for the best. Find the property manager first, buy the property second.

Fourth stupidest thing...when faced with any sort of realistic, honest assessment of what's likely to go wrong with a bad situation, stupid investors start the chest-pounding and bragging. "I was in the Army! I can handle this!" "I climb mountains for fun! This will be easy!" "I ran the XYZ marathon! No problem, baby!" The Army, the mountains, the marathon ain't gonna help you with a bowed foundation wall. It's like a chimpanzee trying to fix a car with a stick and some screeching.

Jonathon Weber · Answer

1: They take any random person just to fill the place.

2: They lack the understanding for the reserves needed for repairs, tax payments, etc.

3: They think renting out a home is the golden path to early retirement while not realizing there are many months that you are likely to lose money, not make money.

4: Cash flow is lower on home rentals than newbies realize.

5: They think they can just sell it and buy another new home if things go wrong.

6: When things go wrong they become weak minded and give up.

7: They have good success with their first rental and think they are smarter than everyone else and this will be easy for them (not true as there will be some major flops).

Dennis M. · Answer

Top 5 idiot mistakes

Not enough reserves

Not calculating the expenses correctly out of the gate

Being way too nice to tenants

Believing tenants lies and BS stories

Waiting too long to file for evictions

Robert Haney · Answer

Over-paying for the property is mistake #1.

Landlords, as a class of RE investors, are typically guilty of this since their number calculation criteria naturally leads to overpaying.  I personally  know many investors who both FLIP and RENT houses.  Nearly all of them are willing to pay more, and do pay more, for their rental houses.  My strategy thinks this is crazy even though it can/does work.

Every rental house I buy can be flipped for a decent net profit ($15k to $20k on a $145k ARV house) after ALL costs. This reduces my money in the property, improving the rent return, and lowers my risk substantially. In short, I patiently buy flip properties for rentals to avoid the #1 problem. I buy in good neighborhoods (Two tests: There are no bars on the windows and I don't feel the need to carry a gun.); in Houston area the houses are $135k to $175k ARV; the monthly rent is about $200 more than 1% of the TOTAL COST.  Example: Total all-in cost is $130k. 1% of cost is $1300.  Monthly rent needs to be $1300+200= $1500/month. Notice that ARV is not in this formula.  It does not matter since the property is flippable for profit.  Even if a property will not rent for 1% of ARV my returns are excellent because I don't overpay for the property.

Purchase Formula: ARV minus Rehab Costs minus 17% of ARV = Buying Price that will work for MOST properties, but you still have to run the rent return criteria numbers.

I know landlords who pay retail prices for rental properties off the MLS because their rent return calculations pass.  While this can work, why do it when flippers are buying under retail price every day?

Cody L. · Answer

Biggest mistake I see is simply NOT buying their first rental property.

Jay Hinrichs · Answer

chasing yield..  believing in the statement the property has to meet my CRITERIA  and said CRITERIA is returns that put you squarely in high risk assets. not realizing the market price for Risk  VS Return..

and don't get me started on remote BRRRR that strategy is so fraught with risk  all great in a book and in Theory in practice very tough VERY

Anthony Wick · Answer

Purchase Agreement mistakes/mistakes before even buying a property:

1. Not asking for estoppel agreements.

2. Not asking for prorated rents and full damage deposits at close.

3. Not writing in PA no new leases or modifications to current leases.

4. Not trying to get a 12 month Home Warranty paid by seller (they're a pain to deal with, but still way better than paying several thousand out of pocket in that first year).

5. Not getting a professional home inspection done.

6. Not believing your numbers, or massaging your numbers to fit the deal. The numbers are the numbers.

7. Being the winning bidder on every "deal" you find. If you aren't losing some deals, you're paying too much.

8. Not having enough reserves (has to be said again). That first 6 months there will be unexpected expenses. That's a fact. (Read #4 again)

Dennis M. · Answer

I can tell you from painful experience a 100 old apartment building is going to cost you more money and burden your life with tenant calls  far more than one that’s only 30 -40 years old . That goes for any house .You can have an absolute grand slam on paper with the numbers there and a cashflow expectation of 500$ free and clear but when your getting phone calls on Sunday night and review the true cost you realize your losing money instead . Literally The first year, you might not make one penny until it’s stabilized and all the demons came out

Bob Prisco · Answer

@Brett Mason not realizing there will be more repairs they they expect, and nothing stays 100% occupied forever

Good luck

Joe Villeneuve · Answer

Number one mistake:  Looking to close on a property instead of a deal, and accepting a bad deal because you're focused on the closing instead of the return.  Then, you rationalize a bad deal into a good one.

What mistakes do most people make when buying their first rental?

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