If you’re thinking about investing in real estate, there are 5 common mistakes many new investors make that are easy to avoid and can save you valuable time and money, getting you started out on the right foot.
We’ve summarized these 5 mistakes for you below, check them out:
1. Cheaping Out
You’re a new investor. You’ve made the conscious decision to invest your time and money into real estate. This is a large commitment for any investors and seeing a hefty portion of your savings going towards the down payment on an investment property can lead to tightening of purse strings.
This can be the result of a lack of funds, or simply the mentality of cutting expenses to maximize profits. Sometimes, however, you need to spend money to make money. This shouldn’t surprise people who’ve already made the decision to put their savings into a property, but for many new investors, not spending can be a major mistake.
Here are some commonplace areas new investors cheap out:
Cheaping out on the property purchase:
It’s not uncommon to want to get started and not want to fork over enough to afford a nice home in a nice area. When this is the case, many investors end up settling for something that’s okay at best.
If you’re planning to put money into a property you can improve the structure, but if you’re not in a great neighbourhood, you’re stuck there.
Buying a better property in a good neighbourhood tends to draw better tenants, fewer repairs/expenses, and a lower turnover rate.
Cheaping out on advertising:
Kijiji and other free classified sites can be great places to advertise your property for rent. But unless you pay to bump up your post, your listing will quickly become irrelevant on page 6. By paying a few dollars and monitoring your ad, you can stay on the first few pages and increase the exposure of your property.
Many new investors think that placing a free ad online is enough to promote their property and they miss out on major traffic. Directional signs pointing to your property, as well as yard signs in front of the house, are all valuable expenses. This helps people find your property and the perfect tenant may see it in passing, while they may have missed it online.
Ads in your local paper can be well worth the cost too. You want to generate as much exposure to your property as possible, giving you the largest pool of potential tenants to choose from. Advertising is part of the investment, and can make the difference between the quality of tenant you get and how long your property sits vacant.
Cheaping out on insurance:
Many new investors search for the least expensive insurance policy, which usually offers the most basic coverage. While there’s nothing wrong with getting a good deal, there can be a huge problem when cutting necessities. This is a large investment, protect it and give yourself peace of mind. Find an insurance plan that works best for your property, even if it means paying a little more for it.
Cheaping out on a lawyer:
This isn’t just about cheaping out, but more generally, working with the wrong lawyer. Finding the right lawyer for your investment property isn’t the time to simply go with your family lawyer or someone that helped your friends once. You will want to work with a lawyer that has experience working with real estate investors. You wouldn’t get your family doctor to perform heart surgery, so don’t take that approach with your real estate investments.
Cheaping out on repairs:
There are a lot of Band-Aid repairs that’ll make something functional, but that shouldn’t be what you strive for in your investment property. In other words, don’t cheap out on repairs. If you’re not a plumber or an electrician, don’t tinker around trying to fix something. Get a professional to fix the problem properly so it doesn’t turn into a bigger problem down the road. More often than not, putting repairs (proper repairs) off, costs more in the end.
The same goes for upgrades in the home. While you don’t need to go with the most expensive upgrades, you should be choosing good quality products that look great and will hold up. They won’t have to be replaced as often and your tenants will appreciate them.
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2. Not Taking The Right Steps During Vacancies
No real estate investor likes vacancies. It means you’re stuck paying expenses instead of the tenant paying them. While we all hope vacancies will be short and far between, there are a few important steps new investors overlook during times.
Putting The Utilities In Your Name:
This is a simple, but important step. You don’t want to go to show perspective tenants the property only to find that the power has been turned off. New investors often overlook this step when first getting the property too. Even if you’re not going to be living there and the property will be empty, you still need to ensure all utilities are set up and in your name.
Turning Off The Water:
This is especially important during the winter. Avoid frozen or bursting pipes, floods, or other expenses throughout vacant periods by simply shutting off (and draining) the water throughout the house. Also, don’t forget to drain exterior taps.
Keeping an Eye On The Property:
There may be periods of time in between showings when you may not need to go to your investment property, but it’s still a good idea to keep an eye on it. This is also a good time to take care of yard work or maintenance on the property. Any number of things could happen while sitting empty so it’s smart to visit (or get someone to check up on it) throughout the vacancy.
Clean and Make Any Necessary Repairs:
Scrub your property (or hire professional cleaners to do it for you) between tenants to make it look clean and fresh. Also, look to see if there are any necessary repairs or rooms in the home that could use an update. It’s amazing how a quick coat of paint can make a house seem fresh and new. Updates to the kitchen or bath are also great ways to be able to charge more for rent and make the space more appealing to tenants.
3. Prescreening Tenants
Prescreening a tenant over the phone or email may seem like a wise use of time, but there is a better way to go about it. If you try and weed through everyone who shows the slightest interest in your property, you’re going to waste a lot of time and energy. Instead, set a time and day you’ll be at the property and tell all interested parties to come see the house at the same time. This will weed out a few, but it also means you’ve consolidated your showings to a specific window. It doesn’t matter if you get a bunch of people coming through who aren’t right for the property, you’d be there anyway and the extra traffic works to your advantage.
By focusing all of the traffic to one time, your property will seem more desirable and it will create a sense of urgency in potential tenants to act quickly so they don’t lose out to another prospect.
You’ll quickly separate those that are serious about signing a lease, and this short list of potential tenants is who you want to spend your time screening, checking their credit and referrals.
4. Failing To Set The Right Tone With Tenants
Set the tone with your tenants. It can be tempting to try and befriend them when you start out, but your tenants are not your friends. This is a valuable lesson.
Be kind to them and treat them with respect, but you have to demand that be reciprocated…no sob stories about why rent is 2 weeks late allowed! It’s your asset, your financial future. You have a responsibility to make sure the mortgage is paid, and they have a responsibility to pay you rent. NO EXCEPTIONS! If a tenant does fall behind in rent, you need to remember this is a business agreement and issue the proper notice (N4).
5. Not Having A Clear Goal And Over Analyzing
What is your end goal?
Are you looking at this as a long-term, mostly hands-off investment, or are you looking for high-return, hands-on investing? These are important questions you need to ask yourself. Lacking clarity and focus can prevent you from moving forward and reaching your goals.
Don’t be afraid to act though. Start off by educating yourself (reading this article is a good start), and build a team around you that can help you navigate the early steps of real estate investing. Talk to other investors. Find an agent, lawyer, and tax specialist who specialize in investment properties. This team will help start you off right and develop a strategy that works for your goals.
Don’t over analyze your decisions. Starting off can be intimidating because no matter how much you read about investing beforehand, you’ll always be learning as you go. When making big decisions you likely won’t have all the information, but that’s okay. As long as you have enough information to make a decision, you can move forward and figure things out from there.
One common area new investors tend to over-analyze is getting the right tenant into their property. You may have a few good potential tenants and while you’re going back and forth weighing the pros and cons of your options, these tenants may end up finding another house to rent. While you want to make sure the potential tenant is qualified, you need to maintain a sense of urgency when filling your property. Decisions need to be made, and that’s often hard for investors starting out.
In short, be informed but don’t let the small uncertainties hold you back from reaching your goals.
If you can avoid these 5 mistakes, you’ll have a real advantage when starting out as a real estate investor. Even if you’re a seasoned investor, it’s never too late to learn from your mistakes and move forward.
Best of luck on all your investing ventures!