What mistakes do most people make when buying their first rental?
Contractor · Oklahoma, OK · Member since 2019 · 67 posts · 8 votes
What mistakes do most people make when buying their first rental?
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Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
7yI 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.
19 Replies
- Member since 2018 · 110 posts · 109 votes7y
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).
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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.
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes7y
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.
- Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes7y
Not knowing your own risk profile. If you're risk tolerant you're very likely to buy a bad deal in your eagerness. So you have to be self disciplined. If you're risk averse you're probably not even looking at RE so you'll be fine :-).
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Number two mistake: Thinking that it's OK to buy a bad deal (negative CF) because it's your first...and it's a "learning experience". If that were true, I want to meet the REI that lost the most money starting out. Think of what you could learn from them.
- Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes7y
@Brett Mason not realizing there will be more repairs they they expect, and nothing stays 100% occupied forever
Good luck
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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
- Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes7y
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
- Member since 2018 · 110 posts · 109 votes7y
A lot of young people will go to YouTube and watch people who are multi-millionaires from buying real estate and think they can become that person without realizing it took those people 30 years to get to where they are now and none of them making that big money are young. Or they will see some young guy in their late 20's or 30's being a "paper millionaire" with limited buying power and they want the same "dream." Even for those in their late 20's or 30's took nearly a decade to get the "paper millionaire."
Billionaire real estate moguls can be counted on two hands. And those guys built real estate as part of their real estate business.
Why am I posting this? It's never been easy even for the super rich. You start small, you fail many times, you keep trying and build from what you learn.
And don't be stupid and go out and buy a used lambo for $40k just because you made some money off of a sale. You reinvest it. You buy a lambo or lease a Rolls when the lease on a Rolls is nothing more than a week of cash flow.
- 7yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
I'd say overpaying, changing their numbers to make them work even though they don't, forgetting expenses, forgetting that they are buying a rental, not a house for them to live in and going to quantity over quality. The last one is important as the cheap homes are cheap for a reason; they will cost you more in repairs and turnovers and take more time to manage.
- Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes7y
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)
- Investor · Sugar Land, TX · Member since 2016 · 62 posts · 48 votes7y
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?
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes7y
Originally posted by @Brett Mason:
What mistakes do most people make when they buy their first rental property. How should I get started?
Biggest mistake I see is simply NOT buying their first rental property.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes7y
Originally posted by @Jay Hinrichs:
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
I 2nd this...chasing yield.
District Invest Group546 Reviews - Member since 2019 · 2 posts · 2 votes7y
A few of the biggest mistakes people just starting out make are.....
1. Not screening tenants
This can lead to a number of problems for obvious reasons, such as lack of respect for the property, late payments, bad communication, and many other issues. You want to make sure they have a solid rental history, good references, solid credit score, and no history of late payments before allowing them to live in your rental.
2. Not having a comprehensive lease
You want to make sure that your lease is detailed and specific to the state of your rental. Having a good lease with important clauses can save you from misunderstandings that could turn into a bigger problem down the line.
3. Being a bad communicator
As a landlord you need to set very clear expectation, always be consistent with your policies, and keep records of conversations.
4. Lack of a support team
Make sure you are not trying to go at it all by yourself. Having a good group of people such as service professionals, lenders, property manager, agent, and so on can save you the hassle of having to be all those people at once while dealing with your responsibilities as a landlord.
5. Having the wrong mindset
Last but not least, you want to make sure you are being proactive and organized in your duties as a rental owner. Being organized with expenses and keeping receipts, staying proactive on repairs and issues with the home, and overall just handing obligations with the rental right away rather than later.
Hope this helps. Good luck, hope everything goes well!
- Blue Springs, MO · Member since 2015 · 481 posts · 313 votes7y
Originally posted by @Jim K.:
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.I had to buy my first house before I figured this out. The inspector missed a couple of fairly obvious things - they cost me less than $100 to fix, so it wasn't a disaster, but I did have to do the work. Since then, I always advise people to assume that everybody their realtor recommends to them has a kickback arrangement with that realtor. (Also, don't tell your realtor that you're making this assumption. If you do, they will argue up and down that they do no such thing, it's illegal, they'd lose their license, etc, etc.)
I've bought two more houses since then, and I brought my own home inspector to the deal both times.
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes7y
It doesn't have to be a kickback. Just the possibility of repeat business sourced from the realtor will keep the home inspector from saying things to the buyer such as, "This place is total garbage and you can do much better for $xxx around here."
Would you trust a used car salesman's recommended mechanical inspector, however many independent certifications from obscure, official-sounding organizations he had? But no, for a much larger purchase, you should trust a used home salesman's recommended building inspector...it's just nuts.
- Member since 2019 · 135 posts · 25 votes7y
Some tips for you:
Start learning and reading from all resources; define your goals and know your limitations; do more research on the market you would like to invest in; gather professional real estate investing team to help you.
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