This one mistake has cost investors thousands!
Over the years I have seen one big mistake that real estate investors make over and over again that costs them thousands of dollars. I will explain what this mistake is and how you can avoid it so you too do not lose out on thousands of dollars.
The one mistake that costs real estate investors thousands of dollars. What is it? You ready?
They over pay for the property.
(Sigh) Are you let down? Think it's cliche? Let me explain. You can over pay for a rental property in several different settings (and boy have I seen each setting). You can overpay for a property that is on the MLS. "Man, I really wanted this duplex and I got it, just had to pay $10,000 over asking price!" You can overpay for a property via the foreclosure auction. "Man, I really wanted this duplex and I got it, just had to outbid that other guy $10,000 over my threshold." You can overpay for a property doing a 1031 Exchange. "Man, I really couldn't find much out there that I liked, but I wanted to avoid the capital gains hit, so I paid $10,000 more than the other guy so I could roll my proceeds into this duplex."
What is the problem with overpaying?
Like any rental property, these buildings have maintenance costs associated with them. When you overpay for a property, your pockets might not be as deep, or worse your margins might be razor thin. When a roof needs to be replaced, when the boiler craps out in the dead of winter, when a tenant moves out in the middle of the night and leaves you with vacancy, these burn a hole in your pocket and can quickly put you in a negative cash flow situation.
Do not be naive. This can and likely will happen to you at some point. Do you think your tenant with no heat will care that you over paid for your rental? No. They want heat in their home and a dry roof over their head.
We often get new tenants who complain a lot about their prior landlords not fixing anything, if we know the area (or the landlord) we quickly know if the owner paid too much for the property. Owning a rental and not being able to fix things is not a good business practice. It leaves you with a rotating door of tenants and higher vacancy rates.
If you want to save yourself thousands of dollars as a real estate investor, you must bake into your offer the fact that large expenses will come up. Do not get caught up in the hype of buying at a sheriff sale, do not let the realtor get you excited and tell you that you have to pay over asking (sometimes you really do in all honesty). Do your homework and most importantly, make sure you are properly capitalized. Refi till you die (the method pushed religiously by Biggerpockets) is not the way to financial freedom, it's the way to get a lot of units quickly and then go belly up.
How to avoid this mistake?
You need to make sure you have proper reserves. We like to tell our clients to budget 8% a year in maintenance and repair costs. This number is based on the amount of repair work we need to do to properties as the property manager and it is a pretty fair number.
Treat each deal like a spreadsheet, not a relationship. You're not marrying the house (one spouse is enough!) it's a business transaction. You're buying the spreadsheet. This doesn't mean you offer a stupid low offer for the property, it means do your homework. The price either fits what you want to do or it doesn't. Don't overpay. There are always other rental properties you can buy.
Have a realtor you trust who knows investment properties, or consult with your property manager as well. We offer tons of insight to our investment property clients and some trust us to the point that they make an offer without even seeing the property! Imagine having realtors or property managers like that on your team?
To wrap it up, have the proper teammates in place (good realtor who has your best interest in mind and a great property manager) and make sure you stay level headed when analyzing the rental.