This week I am writing about the 5 Pitfalls of Real Estate Investing. My last post, Love Hurts, addressed Pitfall #1: Falling in Love with a Deal. Now that you’ve seen how love can make you overpay for a property let’s focus on Pitfall #2. As mentioned before, focusing on the numbers will ensure that you buy a solid investment that gives you your desired return.
Over-Estimating the Return On Investment: It seems simple enough to calculate the ROI on a property, however very few get it correct. Many factors make up the ROI with real estate and getting one of these factors wrong can result in an investment gone bad. When estimating your ROI it is important to take all aspects of the deal into consideration. Do not forget about general repairs, vacancy rates, damage from bad tenants, delinquent tenants, and HOA/Condo dues to name a few.
General Repairs: It’s important to take into account the cost of maintaining the property in order to ensure deferred maintenance expenses don’t catch up with you in the future. This includes analyzing the age of the roof, the windows and the heating and air-conditioning systems to evaluate their life expectancy. Failure to account for these repairs can drastically affect your ROI. Just because a roof isn’t leaking today doesn’t mean it won’t in the future. Knowing the life expectancy of these items will help determine the prices you can pay.
Vacancy Rates: Vacancy will happen, however, many investors run there pro forma’s with little-to-no vacancy rates. Underestimating vacancy rates can greatly decrease your estimated return.
Damage from Tenants: Many investors will say that the damage from the tenant will be covered by their security deposit upon move out. Unfortunately, the tenants that usually damage your investment are also the ones that you had to evict for non-payment of rent. So in this case not only has your vacancy rate gone up, but now you have repairs that are needed to get another tenant into the property. Although you can receive a judgment for these damages and lost rent, I wouldn’t plan on collecting!
HOA/Condo Dues: These are expenses that are very commonly missed and often give the investor a false sense of the deal they are getting on the property. Often if the HOA/Condo fees are high on a property, the values will be lower. Don’t be fooled by what seems to be a great value! Take into account what these fees will do to your ROI.
Each real estate deal is different and will require different calculations for each of these expenses. Keep your mind focused on finding the true ROI for the property you are trying to purchase. If you are looking to invest in real estate you do not want to miss the rest of this week’s posts on the 5 Pitfalls of Real Estate Investing!
I would love to hear from you! If you have any questions or comments feel free to leave a reply below.