If you're looking for a way to create an alternative income stream, real estate investing is a good choice. Many of today's markets are providing good returns as the economy slowly recovers. But a first-time real estate investor can face some pitfalls if they are not careful about how to approach this new venture. Here's a handy guide to 4 of the most common mistakes and how to avoid them.
Have too Little Cash. A hot property market requires more cash on hand than you may expect. You may find that you need to be able to provide a cash offer to beat other offers. In addition, mortgage lenders working with non-owner occupied homes generally require a larger down payment (perhaps 20% or 30%). Finally, the rental busines itself often calls for having money to keep a cash flow going while units are empty, renters are late, or repairs are needed.
Not Treating it as a Business. Many investors starting out with a single unit don't think of themselves as a business. But if you fail to think like a business manager, you may lose money and time. Create a business plan, look at the house without sentimentality, and do proper contracts with all your tenants. In addition, keep all records and receipts of expenses and income written down and organized for tax time.
Invest too Much. When choosing a first property, have a solid budget number in mind and avoid the tendency to max it out or exceed it. Spending all of your budget on the house itself may leave you little or nothing to work with should you discover problems that need to be fixed before you can rent (such as old utilities, mold, zoning issues, or permits). In addition, when making renovations, don't go overboard on amenities like granite countertops, stainless appliances, and specialty flooring. Choose very functional materials that look nice and will hold up to wear and tear but won't break the bank when they inevitably need to be replaced.
Don't Consider the Location. A rental unit is more than just its property. Look for neighborhoods that offer what renters in your area look for. This could include looking for things like proximity to local universities, an up-and-coming neighborhood near a thriving downtown, an area with good schools, or easy access to public transportation. Think about the type of tenants you want, then stick with areas that provide what they find attractive.
By knowing how to avoid these and other common errors, you can help create a first rental investment that not only brings in a positive cash flow now but also for years to come.