Top 5 Mistakes When Investing in Rental Property

It cannot be denied that there has never been a better time to invest in rental properties, provided you have the cash for a down payment and the credit to get a loan (or you’ve decided to join an investment group). With the housing market still floundering you can buy into properties at cut-rate prices, and some of them need very little work to be habitable. From there you simply rent them out (more people are renting than buying these days), let your tenants pay the mortgage, and get a little passive income on the side. It all sounds too good to be true, right? It might be if you’re not careful. If you have the money to invest, you want to make sure that you do so wisely, so here are just a few common mistakes that you’ll want to avoid when investing in rental property.

1. Buying “as is”. In terms of pricing, you’re not likely to find a better deal than foreclosure properties, but they don’t come without their hassles. Once a bank takes over they usually slap an “as is” addendum on the sale, which means that you agree to take on any troubles that may come with the property with no chance for financial recourse. If you buy from a homeowner you may pay a bit more; but you’ll also have options should you face issues that weren’t disclosed at the time of sale.

2. Failure to research. Most people understand that they need to arrange for an independent inspection of the property before they buy to uncover any issues that could be costly down the road. But since you’ll be renting out the property you should ensure that you have chosen a good neighborhood that is desirable for renters (low crime, good school district, etc.). Sites like Zillow can show you what a variety of properties in an area are valued at, but keep in mind that buying the most expensive house on the block doesn’t mean you’ve chosen a good neighborhood that renters will jump at.

3. Exceeding your budget. If you feel like you’ve found the goose that laid the golden egg, you may be willing to go beyond your preapproved budget in order to obtain what you see as the holy grail of homes. But by purchasing a property that is beyond your means you’re only putting your entire investment at stake. What if you don’t get renters right away and you have to pay the mortgage on your own for several months? What if you hit a snag with getting the house up to code? You don’t want to be overextended in these cases or you could lose everything.

4. Partnering with the wrong people. Investing in property is expensive, so you might be tempted to start a joint venture with family members, friends, or even an investment firm. Just remember that you are trusting these people with your money (and vice versa) so you’d better be sure they are worthy before you get into bed with them.

5. Second mortgages and hidden liens. One terribly common mistake is failing to verify the provenance of a property. Just because a seller doesn’t mention a second mortgage or liens against the property doesn’t mean they aren’t there. With the economy in the toilet, it’s not that surprising that many homeowners have done a remortgage search, borrowed against their property, and even used their house as collateral. So do your homework here and make sure that you’ll be the only one with a claim to the property once the paperwork is signed.