Avoiding the most common Landlording Pitfalls….lessons learned.

Have you been investing in rental property only to find its not as easy as you thought? Lost money where you thought you would make it? Not seen the “projections” come true in reality? Studied up on techniques and strategies, only to find it harder in practice than described?

Most of us hope for the best, try to educate ourselves, practice careful due diligence, and crunch our own numbers. At some point, we either buy the deal or not, based on perceived risk, potential return, and our short and longer-term goals. But things often don’t go as planned, especially in the current heated and competitive market for quality rental real estate.

Complete Property Services has helped its clients buy more than 250 investment properties, mostly single family homes. We also manage more than 350 properties. In the course of finding our way these past five years in business, we have learned many hard lessons that we try to apply on our clients’ behalf. Here are the most common mistakes we have seen made over and over, and that you should try to avoid:

1. Paying too much for the property. Most realtors and property “wholesalers” tell you the property is worth more than it is. Most houses will appraise for 5 – 10% more then they will actually sell for. Don’t accept the highest price where some similar house sold at as your comparable value. Try to use “mid point” comps to value your potential buys. What is the average dollars per square foot that very similar houses sold for within the past 6 months? Then pay at least 15% less than this value, including your repair costs. If you pay full price for houses, don’t expect them to cash flow by the time you pay for maintenance and vacancy.
2. Underestimating the repair costs. Complete Property Services rehabs 10 or more houses per month. We get very good prices for everything. We still spend $5,000 even on the cleanest of houses making it “rental ready.” Keeping slightly worn carpet and decent looking walls will stand out as a dingy property when competing with fresh rehabs. The rental market is very competitive, and properties that don’t sparkle sit vacant or lease at a big discount.
3. Overpricing the property. Rents are going up now, but had declined 20% or more throughout the Houston Metro market over the prior three years ago. Low cost, easy money has made homeowners of many former good tenants. The people who still rent are weaker credit, higher risk propositions. And they still have lots of choices. Too many owners hold out for the higher rent. Start at a reasonable ask, and come down quickly until that phone starts ringing.
4. Holding out for the perfect tenant. Once the phone is ringing, you know you are priced at market. Then hold out for the best application you can get. And don’t be too picky, or your units will sit vacant even longer. Look at the overall risk of applicants, and pay the most attention to whether they can afford the home, and second to whether they pay other people late now, or just paid poorly in the past and now have a better situation. We have also found that accepting pets helps you get better tenants.
5. Dragging out repairs. Besides pricing it right, each day and week that goes by with no tenant costs money. Taxes, insurance, and the note need to be paid. The most common source of delay can be getting the make ready done, which requires getting contractors to show up and do their work. Doing the work yourself might save money, but don’t let it drag out for several weekends or you just lost out.
6. Paying too much for things. To be a successful investor, you need access to inexpensive maintenance and other services. From your all-important handyman, to air conditioning, plumbing, and electrical assistance, you need to identify and win the hearts of small, hard working, and reasonably priced contractors. Learn what things should cost, and if you get involved with a General Contractor, make him do a line item cost bid. Have someone appeal your property taxes. Make sure you are getting a good deal on your insurance. Property Management is a nickel and dime business, but these little savings can add up to make the difference between making and losing money!

So don’t give up on real estate, just learn to make it work for you. And remember that it’s a long-term game. We are fortunate to be one in one of the few U.S. markets where properties will actually cash flow from market rents. In most other large markets, investors must factor in negative cash flow the first several years of ownership, keeping faith that appreciation over the longer term will make their investments work.
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