the top 3 pitfalls to avoid when buying a rental property

There are so many factors that come into play when purchasing a rental property. Some of these factors are fixed and some are variable. But with education and experience an investor can become creative and see opportunity where others cannot. Most of the pitfalls come under due diligence.

Not knowing the property:
We all suffer from biases but it’s important not to step outside your area of expertise. When buying an investment property there are a lot of skillsets needed in order to apply risk reduction approaches. Investing in real estate isn’t risky. People are risky due to not reducing their risks by leveraging other skillsets, systems, tools, and technology. In order to know the rental property, it is important to gather all information possible about the property. Examples of gathering information is investing in a good inspector. An inspector will reveal issues of the property that an investor may easily overlook. These overlooked issues can become very costly and sometimes devastating. Property inspections are a skillset of their own and if an investor chooses not to do a thorough inspection, it is only increasing their risks by lack of due diligence. An investor should see all the permits pulled on the property. This can usually be done through the local building department or the reputable inspector. To better understand the value of a property, an appraisal should be conducted to get an appraised value. The investor may also leverage a realtor to get a BPO (broker price opinion) and/or a CMA (comparative market analysis) to better understand the value of the property. There are many other ways of gathering information about the property such as a sellers property disclosure but the majority is mentioned above. It’s a grey area. An investor should gather all the information possible before implementing an acquisition but not become paralyzed by overanalyzing.

Not knowing the expenses or numbers and how to manipulate them:
There are some expenses that are fixed and others that are variable. It is important that an investor knows how to measure and manage these expenses. In most cases, it is best to hire a good property manager to help reduce the variable costs such as maintenance and vacancies along with liabilities of conducting real estate business. Unfortunately, properties don’t come with a service manual. Most properties are unique on what preventative maintenance that needs to be done. Without a proper preventative maintenance plan, costly repairs will come about that could’ve been reduced or eliminated. Vacancies are another variable cost that can be reduced with proper timing of advertising and marketing. If the property is financed, the expense for paying off the loan is usually fixed. The costs of taxes and insurance are other expenses that must be considered. Besides being aware on how to reduce expenses, an investor needs to know how to increase the value of the property without over improving the property. The investor needs to know how to increase income and the value of the property as a whole without investing in things that do not provide a substantial return on investment. Typically an investor will approach all of this with the highest and best use of the property but some innovation can provide substantial returns. As a rental property, the income may be increased by renting out the rooms to college students or other tenants. A short term rental could be an option or vacation rental.

Not knowing the local market
Some say “location, location, location,” while others may say “finance, finance, finance,” but in reality, it depends. If the finances and numbers work, location may not be that influential. Innovative investors can make income in nearly any location. Depending on the investors approach, it is important to understand the market. This will help foresee the future value of the property. Some locations have advantages over others such as transportation facilities, natural resources, weather, and employment opportunities. Either way, the market needs to support the investors intent and plan for a successful investment