When you’re looking to invest in real estate, particularly for rental income, you should always head into the process with as much knowledge as possible. Rental income can be a great way to generate positive cash flow, but renters are also putting your investment through normal wear and tear and perhaps much more. There is a careful balance between a rental that continues to generate income year over year and a money pit that can negatively impact the bottom line of even the savviest investors. Going blind into real estate investments is never a good idea and today, we have a cautionary tale from our very own Gail Overton. If you’re ready to make the plunge into the world of real estate investment and are looking to generate rental income, read on and learn from other first time investor’s mistakes.
Sylvia* purchased a home with the intent to use it to generate rental income for her new venture into real estate investing. She placed an ad on Craigslist and promptly found a renter. She was overjoyed; she could now sit back and watch the money roll in! Within 6 short months, her renters had vacated the property, but not before stripping the property of appliances, light fixtures, security systems, and even the kitchen sink! Making matters worse, they used the fireplace poker to poke a single devastating hole in each of the first floor tiles (1,200 square feet of tile). Needless to say, the place was destroyed.
Trying to save money, Sylvia opted to not pay for homeowners insurance (in particular, a policy designed to cover an owner who rents their property) assuming the renter would cover everything with renter’s insurance, something she did not require in the lease. She met with the police and reported the crime, but the police were unable to assist since she had no witnesses nor could she prove the renters had done the damage to the property. Having opted out of a homeowners insurance policy, she could make no claim for the damages or theft. The cost to repair and replace the stolen items exceeded $30,000 and the responsibility of paying that rested solely on her shoulders.
So what did Slyvia do wrong?
- She lived 3 hours from the property and was unable to make regular checks on her property or the tenants
- She used Craigslist to find the renters and did not do background checks, verify the tenant’s income, or run credit checks on the tenants
- She undervalued the rent at $800/month when the average for her home in that neighborhood was $1,350/month
- She did not insure her property against damage or theft with a comprehensive homeowners policy that included the use of her home as a rental
- She never met the neighbors who assumed the renters were the owners so were not suspicious when the robbery took place
What should Sylvia have done differently in order to prevent this situation? What should you do? Whether you’re new to real estate investing or just adding to your current rental portfolio, be smart and make sure you’re covering yourself and your property.
- Unless you live nearby and plan on routinely checking on your property, hire a property manager, they provide invaluable services to you as an owner:
- Perform uniform credit and background checks on every tenant over the age of 18
- Use regulated real estate contracts which protect both the owner and the tenant
- Provide accurate rental rates for your property, so that you can price it correctly
- Ensure the rent is paid and repairs are made
- Can require renters to show proof of renters insurance
- Renters call them with the headaches instead of waking you up in the middle of the night for emergencies
- In the event a renter must be evicted, they take care of the necessary procedures on your behalf
- Always insure your property:
- In the event of a crime, you are protected
- In the event of an accident on the property, your liabilities are limited
- In the event of theft or damage, you are protected
- Meet your neighbors! They are your eyes and ears and your first line of defense. Share with them your contact information or better yet, your property manager’s information.
Whether you’ve done it a thousand times or are just buying your first property for rental income, remember to work smarter, not harder. Real estate investing can be costly if you make the wrong mistakes, so consult with a real estate agent that has experience with investment properties or property management so that you can avoid some of the pitfalls that can come along and turn a great investment into a nightmare property.
* Sylvia is a fictitious name and is an amalgam of several different situations and stories.
image courtesy of Philip Taylor PT
I’m in Real Estate from a decade and as per my experience the most important thing to consider when you are making a big investment is to closely analyse that It’s risk ratio is not more then 50%. This will minimize the chances to get big losses.
We advise every investor to analyze their comfort level with risk and take appropriate steps to minimize their exposure to a level they feel they can handle. We have some investors who love a good risk – often the payoff is higher the greater the risk. For the average investor that’s feeling a bit more risk averse however, risk reduction becomes essential.
To people who keep asking how to be a real estate investor, there are several options to consider. You can acquire property and lend to tenants for monthly cash flow. Unlike acquiring property to sell, renting provides constant income, and the investor can also sell the property after appreciation. You can also purchase property and sell after price appreciation. For people who do not want to get directly involved in property acquisition or trading, it is still possible to invest in real estate through real estate investment groups whose investments are run by experts or real estate investment trusts that involve trading in the stock market.
This sounds like it could be rather complicated, so we would definitely recommend calling a real estate attorney and discussing your options.