5 mistakes first-time real estate investors are constantly making, according to a landlord who owns over 20 properties
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- Real estate investor and agent Dana Bull says there are several mistakes she sees new investors make when buying real estate.
- One mistake first-timers make is hiring a property manager instead of doing the work themselves. An investor who owns one or two places might save a lot of money by managing their own properties.
- She also sees new investors fail to treat their properties as a business, without a plan to grow or goals to achieve.
- And, she says that new landlords often don't have a backup plan if their property doesn't rent as quickly as they hope.
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Real estate investing has a definite learning curve, but with the right research and mindset, some of the confusion can be easily avoided.
Real estate agent and investor Dana Bull started investing in properties at age 22, and now owns more than 20 properties total. In her experience with not only buying and managing her own properties but also helping her real estate clients buy the right properties, she says there are a few mistakes she sees over and over again from first-time investors.
1. Hiring a property manager right away
Being a landlord isn't for everyone — it can be very time consuming, and require a lot of people skills to be done right. Given that, many real estate investors hire property managers to handle day-to-day operations and maintenance. But it can be a mistake for some investors.
"Hiring a property manager will run you about 8% to 12% of your incoming revenue. That's before mortgages, and that's before everything that you need to pay out to run the buildings. So it cuts into your profits substantially in the beginning," Bull says.
She says that while it's not necessarily a mistake for people who own multiple properties, it may be the wrong move for first-time buyers.
"You want to hire a property manager for the right reasons, not just because [you] don't know how to do this," she says. "It should be more like, 'I want to hire a property manager to lower rents, or to build and scale faster.' I get a lot of newcomers to this industry and they're just like, 'Oh, I'll just outsource it,' but that's a different mindset."
2. Having a 'short-term mindset' about their property
Real estate investing isn't a short-term investment — it takes time to buy and sell properties, and time for them to become profitable. And all that takes a lot of patience, Bull says.
"You have to train your mind to have a long-term mindset. For example, people will buy an investment property and in the first week or first month, something will need to be maintained or repaired. They get so upset about that in the beginning. And it's that short-term mindset of, 'I just bought this place and already I have issues.'" But, she says, that's just part of the process.
"I find that whenever there's turnover at a building, whether it's a new owner who comes in, or new tenants, there's always something that comes up. It's about re-training your mind that this is part of it," she says.
Having a solid emergency fund before investing in real estate can help you feel more secure as your properties start to incur expenses.
3. Not treating the property as a business
Many landlords think about their rental properties as just a piece of their income, but Bull recommends that new landlords start to see their rental properties as a business.
Says Bull, "Make sure from a legal aspect that you're protected as a business. From a professional perspective, it's how you work with your team, how you work with your vendors, and how you find deals. You want to be professional in every aspect of the business."
4. Not thinking about the end consumer: the tenant
Thinking about your rental property as a business means that you have to think about your property as a product, and understand who you're selling to, Bull says.
"Some clients want to buy a really beautiful property where it's almost like a luxury investment property, but ultimately, who is that demographic? When they do all their numbers for what cash flow is going to look like, on paper it looks fine. But in reality, it's a marketing problem," Bull says. "They acquire the property and they're trying to secure a tenant, but they're not getting any bites because it's a mismatch with demand."
Before buying a rental property, make sure you understand what tenants in your area are looking for, how much they'll pay, and what they'll expect you to provide.
5. Not making a backup plan
When buying a first rental property, Bull suggests having a backup plan for the property if it doesn't rent right away. While that could be as simple as an emergency fund to pay the mortgage while you wait for the right renters, it could also mean a plan to use it for income in other ways.
Says Bull, "When I'm working with clients, I might say, 'I understand you have to buy this to rent it out, but what happens if you're not able to do a 12-month lease, is this an area where you could potentially do an Airbnb? Could you move into the house yourself?'"
Having this backup plan in mind could help make the process much less worrisome, and help avoid future cash flow problems.
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