10 Costly Mistakes to Avoid When Building Your Portfolio
Renters Warehouse Blog
10 Costly Mistakes to Avoid When Building Your Portfolio
When it comes to building your real estate portfolio, you don’t have to learn everything the hard way!
There are plenty of people who have been there, done that –and who have advice to share. From mistakes made when assessing potential properties to expenses that are overlooked, there are a number of issues that first-time, and even experienced investors alike fall victim to.
If you’re ready to start growing your portfolio –and are looking for tips to help you get off to the best start possible, here’s a look at some costly, yet common mistakes that you’ll want to avoid making yourself.
- Not Doing Your Research Ahead of Time
The fact that you’re reading this article now is a good sign that you’re on track to sidestep this all-too-common mistake!
Brushing up on your knowledge of investing, as well as the type of investments that you’re thinking of investing in is a crucial part of finding success. Are you planning on investing in single-family homes, duplexes, multi-family? Be sure to frequent popular real estate investing blogs and forums to learn from other investors, and get ahold of some good books on investing. Look to become an expert in your niche, even before you make that first purchase.
- Limiting Yourself to Investing Locally
While it may feel safer to invest in property or markets that are close to home, and many investors do start out this way, don’t feel that going local is your only option. In some cases, it might make more sense to expand your search and look to other markets. Widening your net allows you to take advantage of markets that might be more affordable –or have better housing stock than what’s available in your own backyard. Today, there’s a lot to be said for diversifying too –something that investing in different markets allows you to do. Learn more about investing outside of your home city.
- Neglecting to Have Inspections Done
One of the most important things you’ll want to do before buying a rental property is to have an inspection done. Never take a seller’s word for it; sometimes they might not even be aware of everything that’s wrong with their property. Unexpected damage can quickly make or break the success of your investment, though, so make sure you pay for an independent inspection.
“We lost a few thousand dollars on a home we purchased that had some subfloor and window rot behind the sheetrock,” explains Ryan Sajdera, Founder of R&S Property Group, LLC. “If only I would have had a professional inspect the property, they would have quickly noticed that the windows weren’t sealing correctly, which caused serious damage over the years. Then, I could have easily used that information to negotiate the price with the seller.”
Another pro tip? Sajdera also recommends paying for a sewer scoping any time you’re buying an older home. This can alert you to additional hidden problems –like tree roots that may be growing into the sewer lines.
- Spending Too Much on Renovations
Most investment properties will require a certain level of upgrades or repairs to bring them up to standard. However, many investors go beyond what is necessary, choosing to believe that if a little is good, then a lot is better. This isn’t always the case, though, and if you overspend, you could end up being unable to recapture the cost of the improvements through the rent.
On the other hand, though, you should also be careful not to under-renovate either! Cutting corners or neglecting important upgrades could leave you with emergency repairs and a higher vacancy rate later on. Find that middle ground and stick to it. In most cases, you’ll want to ensure that the upgrades that you make put the home are in keeping with other, similar homes in the neighborhood. You’ll also want to look for long-lasting, durable upgrades. Tiles, for example, or hardwearing laminate is a better choice than carpet. Cheaper flooring, especially in high-traffic areas will need to be redone every few years, or each time you get a new tenant.
- Trying to Do It All Yourself
One of the first things you should do when building your portfolio, is to build your team as well. Taking on all the projects by yourself, while it might save some money now, will end up costing you down the road. This is because you only have so much time –the question is: where is it best spent?
Rental properties are a business,” says David Merk, real estate investor. “Do you want to be the owner or one of its employees?”
Other people’s time is one of the secrets to building wealth, so take advantage of it and look for cost-effective ways to outsource. A good property manager, accountant, and attorney –along with contractors like plumbers and electricians are all professionals that you’ll want to have on your side when investing in rentals.
- Underestimating Expenses
One of the biggest mistakes that first-time real estate investors make is underestimating their expenses. This is unfortunate, since accurately projecting your income and expenses is the only way you can ensure that a property’s worth investing in.
Here are a few often-forgotten costs that you’ll want to factor in:
- Maintenance and repairs (At least 2% of the property’s value annually)
- Emergency repairs (Maintain funds in an emergency account)
- Vacancies (National average is 7%)
- Utilities (If you’re paying them yourself)
- Property management fees
If you are unsure of any costs, it is better to overestimate than underestimate. Investments aren’t cheap, but they can be profitable –as long as everything’s accounted for. Always run the numbers before investing. See: Numbers You Should Be Running on Every Property.
- Not Saving for Maintenance and Repairs
On a similar note, not saving enough money for repairs and routine maintenance can sink your ship faster than anything else. Your investment will need routine maintenance to keep its value up and there will always be those unexpected emergencies that arise. It is important that you plan and prepare for these costs to avoid getting caught out when something comes up.
- Buying the First Property You See
Don’t make the mistake of rushing to invest in the first property that you see. Instead, take your time to familiarize yourself with what’s out there and what else is available.
“Lots of investors buy properties because they ‘look nice…’” says rental property investor Bill Manassero. “Part of sound real estate investing is in giving yourself a choice so you can select the best one, financially.”
- Delaying Evictions
Delaying an eviction is another mistake that could end up costing you significantly. If you end up with a tenant who breaks their lease –either through nonpayment of rent or violating policies, then it’s usually best to begin the eviction process promptly. Sure, things happen –and you can work with your tenant to help bring them current with the rent, but once you let them get two or three months behind, it’s very unlikely they’ll ever catch up; meaning you’ll have lost out on those months where you could have been generating an income.
- Not Thinking Long-Term
Another costly mistake is neglecting to set long-term goals. But before you start, it’s important to outline your big-picture goals, and then work backward from there, creating a plan to reach them. Take the time to determine for yourself what type of returns you’re looking for, and whether or not appreciation is part of your strategy. You’ll then want to resolve to only invest in properties that meet your criteria.
Finally, don’t fall into the trap of always researching, but never taking action. And don’t let a fear of making mistakes stop you from taking that crucial first step. At some point, you’ll want to put down the books, apply what you’ve learned, and take action; making your dream of owning real estate a reality.
Are you ready to start growing your portfolio? Find turnkey properties ready to go on the Renters Warehouse Investor Marketplace. Then, head over to our research center to gather intel on the area –including employment trends and housing price appreciation. It’s time to make YOUR move!