Investing in real estate can seem difficult. But, if you learn to avoid the biggest mistakes it becomes much easier.
Table of Contents - The Three Biggest Mistakes Real Estate Investors Make
Today I'll be going over the three biggest mistakes that investors make when they start their portfolio.
Running the numbers
We find that most clients and investors only run the basic numbers when they analyze a property. The basic numbers would include the mortgage payment and the property taxes. Next, the investor inputs the rent and they see the cash flows and then they determine if they want to purchase the property. But that's not the right way you, you should include everything. You should include the mortgage, the property taxes, insurance, vacancy rate of 5%, property maintenance fees, and repairs. So for property management, repairs, and insurance, we factor in 20% of the rent. So actually, in total, we factor 20% for random expenses. (This allows us to use 80% of the total rent as income.) Next we then we subtract your mortgage and your property taxes. And if there's plenty left over, then that's your positive cash flow. So we know that our calculation is tough. But we have excellent cash flowing properties, following this method and using these numbers, and it really works.
Also, this calculation is what most lenders will use to qualify you for a mortgage.
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Not hiring the right team
I know we've spoken about this many times. We can't stress that enough, you must ensure you're working with someone who's an investor who specializes in working with investors because they know exactly what you should be looking for and can give you guidance and suggestions.
Here’s a true story…
There's a local real estate agent to me and he shows investors properties and bad locations because, in his mind, he thinks that they want to buy the cheapest home and have the smallest mortgage. He's not a landlord or an investor himself. And the owners are left with properties that are in terrible condition and with low rents and high vacancies. And I've seen them as past customers, and you just hear the complaints and the issues. That is not what investors want. But, that's what this real estate agent thinks. So he's setting all of his clients up for failure because he is not an investor, he doesn't get it. I know I made the example above about the real estate agent. But this goes for every member of your team. It doesn't matter. If they're a contractor or a lawyer, if they're an investor, they will help you out and they will guide you.
We’ve included the cash flow calculator in our investor success toolbox kit, if you haven't downloaded that, then click here to get it.
Location, Location, Location
Bad locations may be cheap, but they will offer low rents and high vacancies. Also, if you need to sell and it's in a bad location, you're going to see it on the market for a long time, you may not get a bidding war, you may not get the price that you're asking.
However, on the flip side, we also don't suggest buying in the best locations in town either, because you're going to pay a premium on the price of that property. So we recommend buying an up and coming parts of town especially near or maybe there's going to be a new transit or new train coming now or in the near future. By doing this, you're going to ride the wave of appreciation in the area plus the demand is going to be there especially because new things will be built around that transit location. So you'll be able to charge excellent rents and your vacancy will be low as everyone's going to want to live in that area because it's going to be very convenient. Also, be sure that the actual town you're looking to invest in has a low unemployment rate and a strong population growth. So these can be found on places such as CMHC, or even the city's actual website will list the stats and information about the city.