By Mike Baird
Thinking about buying a really great looking rental property? Fix-and-hold deals can be great for your cash flow and can give you freedom as you work on fix-and-flip projects. However, I keep seeing new investors make the same mistakes over and over again, and they can ruin even the most lucrative rental property deal. Avoid these mistakes, and you’ll have a serious head start on the competition.
Losing Money on High Interest Rates
If you’re a new investor, you might not be well connected with other real estate investors and private lenders, so you probably go straight to the hard money lenders when you want to fund a fix-and-flip property. That’s just fine when you’ll be paying that loan off within a few weeks or months, but that’s not the case with a fix-and-hold property.
It can take time to get tenants, and your property manager is going to be taking their fee out of your monthly rental fees. You’ll also be paying property taxes and other associated fees. Do you really want to add loan payments with 14–16% interest on top of all that? On the same note, if you’re taking out a mortgage loan for the property, beware of adjustable rate mortgages (ARMs). If you go with one of these, it could have a very attractive interest rate for the first six months, and then you could be looking at skyrocketing interest for the rest of the life of the loan.
Not Considering All Your Costs
You know all those costs I just mentioned? You have to consider all of them. With the rental rate you’ll be able to charge, are you going to get positive cash flow from this property? You absolutely have to do the math on everything that’ll go into your rental properties, not just your costs for buying and rehabbing them. If you don’t take these things into account, you could find yourself with a money pit on your hands. It will be hard to rent at a rate that will gain you positive income and it will be difficult to sell when the time comes.
Investing in the Wrong Rehabs
If you’re buying a distressed property, you’re going to be investing in some rehabs, but you have to understand that your rehabs are going to be completely different if you’re planning on renting versus flipping. If you’re getting your investment back immediately, it makes sense to completely remodel bathrooms and kitchens and to go with the latest designs and trends. If you’re rehabbing a property to rent it out, you’ll want to do it with an eye toward abusive tenants.
Hardwood floors and laminate flooring look amazing, and buyers love both. Once they buy, though, maintaining their flooring is their problem. With a rental property, you’re looking at maintaining and/or repairing flooring in between tenants. Shampooing or replacing carpeting is a lot less expensive than resurfacing hardwood floors or replacing scratched laminate flooring.
If you keep these three mistakes in mind and avoid them, you’ll have a much better chance at finding and rehabbing profitable rental properties. Stay focused on your bottom line throughout the buying and rehabbing process, and don’t forget that you’re going to have to pay both your property manager and the IRS if you hold the property. If you remember these details throughout the process, you’ll have a much greater chance of choosing the right property, doing the right rehabs, and getting a great new source of regular income.