Over and over, we see people making the same mistakes when investing in real estate. To be honest, It’s frustrating! With just a bit more knowledge or with the help of an experienced team, they could avoid the hassles and financial problems that happen as a result of the mistakes they made when acquiring the property.
Nobody likes to get an unexpected surprise or expense, especially when it comes to their investments. If you’re dealing with a large investment such as a rental property, any setbacks can be extremely costly and time-consuming.
Fortunately, many of the most common mistakes in real estate investing can be mitigated or even avoided altogether if you know what to look for.
We want your investment story to be different, so we’ve put together a list of some of the more common real estate investing mistakes we’ve seen. If you can spot them ahead of time, you’ll stand a good chance of saving yourself a lot of future hassle.
- Buying on the Wrong Side of a Market Cycle
- Getting Started Too Soon... Or Too Late
- Tenant Issues
- Repair Issues
- Not Researching the Market for Your Desired Tenant
- Taking on Too Much Without Experience
- Not Analyzing Rental Rates Correctly
- Not Being Proactive With Your Properties
Buying on the Wrong Side of a Market Cycle
As with any investment, the value of real estate can fluctuate. The good news is buying a property is a much safer investment than, say, buying stocks. While the value of your investment property may take a dip occasionally, it won’t drop far enough that you’ll lose everything. At the very least, you’ll still own the land and the physical building.
However, it can still be extremely beneficial to an investor to get in on the right side of the real estate market cycle - a well-timed investment could add thousands of dollars to the value of your property, which could put you months or even years ahead on your goals, depending on how ambitious they are.
For this reason, it's always a good idea to do your research, read up on real estate market cycles and try to determine where the current market is at. Depending on your situation, a short delay in buying might pay off in the long-term.
But you should also be wary of...
Getting Started Too Soon... Or Too Late
Articles and TV shows often make investing in real estate seem ridiculously easy and profitable. Naturally, people want to get in on the action! This means people are jumping into the market before they know what they’re doing.
Without any research or background knowledge, an investor might get in over their head, and experience hardships, such as vacancy, tenant issues or unseen repair bills, which all lead to financial struggles. These problems could be avoided with some more experience, knowledge, or help with the investment.
On the other hand, some investors are too nervous about getting started. They don’t want to make a move until they feel confident they fully understand all of the ins and outs. Gaining knowledge is admirable, but there are some things you can only learn by doing. If you wait too long to get into the real estate market, you may miss out on good opportunities and buy on the wrong side of a market cycle.
This means you could end up purchasing a property during a seller’s market or a property that isn’t desirable for tenants - which is not advantageous for you or your portfolio. You want to buy when the timing is right.
If you do decide to wait for a more favourable time in the market, be sure to calculate how much that could cost you in lost rent and equity buildup - if you time the market well and add a few thousand dollars to the value of your home, but you miss out on a similar amount that you could have been bringing in through rent and mortgage pay down, is it worth the delay?
Tenant Issues
We see this one quite often…
Buying the wrong property can be a critical mistake and one that could be very costly to undo. Before buying any property, take the time to understand what tenant profile it might attract. What types of tenants will you get with that particular property and is that the type of tenant you want? Tenants tend to prefer rental units that contain the following things:
- On-site private parking
- Private in-suite laundry facilities
- Separate entrances
- Soundproofing
- No Smell transfer – separate air exchange for each suite
- Separate heating controls for each suite
- Privacy
A property that doesn’t offer these common “must-haves” will result in higher tenant turnover. Each time a tenant leaves it costs you money for cleaning, repairs, marketing, screening and showings and worst of all, the cost of sitting on a vacant property. These costs can chew through your cash flow and any reserve fund quite quickly.
Repair Issues
Unfortunately, we see this quite often and this one can be a real deal-breaker.
When buying an inexpensive or resale home, it’s very important to recognize if there are any repairs or maintenance the property needs, either upfront or over your desired term of ownership.
For example, say you want to buy and maintain your investment property over a 10-15 year period. Buying a home with a 20-year-old furnace means there is a good chance you will have to replace the furnace during your term of ownership. The same goes for the roof, windows, hot water tanks, cement walkways, flooring, kitchen cabinets and appliances, just to name a few.
This doesn’t make a lot of sense. The money you make each month will likely have to go towards repair costs. These will most likely be cash purchases, and if you don’t have enough cash flow or reserve funds on hand to cover them, it’ll require further capital input from you as the owner. Every time you put money towards your investment, it reduces your overall ROI.
We’re finding that a lot of people - especially those new to real estate investing - do better by purchasing brand-new properties. The modern style and amenities in these homes allow you to easily attract great tenants and you don’t have to worry about repair costs the same way you would in an older home since all new build homes in Alberta come with a warranty. And if you later decide that real estate investing isn’t right for you, you’re able to sell the home and move on before it needs major repairs.
Not Researching the Market for Your Desired Tenant
Before you purchase a property, you want to be certain you’ll be able to find tenants. Think about the type of tenant you want to attract and what types of features they might need.
For instance, families are likely to want a backyard for the kids to play in or a nearby playground, along with good schools. College students or young professionals, on the other hand, may be looking for nearby access to public transit or a place with a high “walkability” score - being able to walk to stores, restaurants, and other amenities.
Once you have zeroed in on the community that supports what your desired tenant profile is looking for, it’s time to start exploring the property types your tenants will most likely rent in that particular area. Choose a home that will appeal and be affordable to this type of person. That might mean buying a duplex, a house with a suited basement, or a single-family home.
Taking on Too Much Without Experience
While it can be very rewarding, being a landlord also means taking on a lot of responsibility.
You need to be able to clean and prepare your properties. You’ll have to advertise, show the home to those who are interested, and screen potential tenants. You need to take care of repairs and maintenance concerns in a timely manner.
It’s a lot of different things, and you need different skill sets for each of those tasks.
Few people are good at everything, but a lot of new real estate investors try to do all of these jobs on their own, thinking it will save them money. And yes, while this means you won’t be eating into your profits by paying other people, it also means you might not be doing the best job.
If you don’t have a lot of experience, you're better off working with a qualified team of people who know what they’re doing.
Many investors choose to go with a property manager instead, who can take care of all of this.
Not Analyzing Rental Rates Correctly
It's a common train of thought: I’m going to buy a property and it will produce a positive monthly cash flow.
It doesn’t always automatically work out that way.
You need to look carefully at the average rental rates for the area and for the type of property you’re purchasing. Yes, certain types of properties are more likely to fetch higher rental rates, but those rates aren’t based on your mortgage. The rates are based on the rental market and what people are willing to pay.
Be sure you have a good sense of how much you’ll be able to charge for your unit to determine whether it’s going to be a profitable venture for you. You want a property where the rent you can charge will exceed the amount you have to pay for your mortgage.
Not Being Proactive With Your Properties
Once you get a tenant into your unit, you’re golden, right? That’s mostly true, but it’s a good relationship with your tenant that’s going to keep them in your place for the long-term. And since getting new tenants costs time and money, you want your tenants to stay as long as possible.
Do whatever it takes to keep your tenants happy, within reason, of course! Usually, this simply means replying to concerns promptly, along with giving people the privacy they want in a home.
Keeping the property well-maintained will set a great example for the tenant. You should always respond promptly to repair requests, otherwise, your tenant might think you don’t really care. If there’s a water leak and the tenant doesn’t think it’s important to inform you, it could result in more damage and higher costs.
It’s a great idea to be proactive with your properties. Doing a walkthrough twice a year is a great way to stay on top of things, noting any required repairs and making sure your tenants are enjoying their stay. Your tenants will appreciate your efforts and having a property in great shape. The walkthrough is also your time to ensure the tenants are living within the guidelines of the tenancy agreement.
Remember, overbearing landlords can drive people out just as much as ones who aren’t involved enough! This is a two-way street and a great relationship with your tenants will pay huge dividends over the long term.
We want you to become a successful real estate investor, and we know the right team makes a big difference. Come talk to our experts today to learn more about how you can get started in real estate investing.
Originally published Dec 19, 2019, updated Dec 10, 2020
