Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Motley Fool Issues Rare “All In” Buy Alert
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More
To be sure, there’s a lot that can go wrong when you invest in real estate. You can overpay for a property, buy in the wrong area, use the wrong lender or loan product, or overestimate the rent you’re likely to receive, just to name a few. The list of mistakes is far too long to discuss every possibility here. But here are three big mistakes first-time real estate investors should know about and take steps to avoid.
If you buy a rental property that brings in $2,000 in monthly rent, and your monthly mortgage payment including taxes and insurance is $1,500, it may seem like the property should produce $500 in monthly cash flow. But that’s not likely to be the case.
Image source: Getty Images.
One big mistake new real estate investors make is that they fail to budget for the unexpected — specifically vacancies and repairs.
At some point, your property will be unoccupied. It may only be for a few weeks between tenants, but it’s going to happen. A good rule of thumb is to set aside 10% of the rent to cover vacancies so you don’t have to come out of pocket to pay the mortgage when your tenants move out. And you’re going to need to spend money on maintenance and repairs over time. Plan to set aside another 10% to 15% of the rent you collect to cover maintenance. When calculating your expected cash flow, don’t forget to consider these expenses, or your projections aren’t likely to be too realistic.
When you buy your first investment property, you have to choose whether you want to hire a property manager or do it yourself. And if you’re not familiar, property managers typically take about 10% of collected rent on a long-term rental property.
To be sure, there are some good reasons to self-manage. For example, maybe you’re a retiree and have the time to deal with tenant issues. However, it’s important to realize that property managers can provide tremendous value for their 10% cut, and the decision to self-manage shouldn’t just be to save money.
A good property manager will market the property, screen tenants, handle complaints and tenant issues, schedule maintenance, pay utilities on your behalf, and more. And a property manager will likely know exactly how to price your rental property, which in many cases can be worth the 10% commission all by itself.
As a final thought, it’s important to mention that (especially in today’s inflated real estate market) rental properties aren’t the best choice for everywhere. In fact, in many markets, it’s next to impossible to find a rental property that will produce positive cash flow, unless you’re willing to buy a property that is in need of major repairs or upgrades.
In fact, many investors are finding that real estate investment trusts, or REITs, are a better choice in the current environment. They have the same general concept (rent properties for income), but unlike buying rental properties, most REIT prices have declined in value, so you might get more value for your investment dollars. Many REITs have long track records of growing profits and raising their dividends every year, so if you’re thinking of investing in real estate for the first time, maybe this option is worth considering.
The Motley Fool has a disclosure policy.
Market-beating stocks from our award-winning analyst team.
Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/26/2022.
Discounted offers are only available to new members. Stock Advisor list price is $199 per year.
Calculated by Time-Weighted Return since 2002. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.
Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.
Making the world smarter, happier, and richer.
Market data powered by Xignite.
About Author
