Underestimating costs. Just knowing how much you can charge in rent and whether it will cover your monthly housing payment for the property isn't enough, experts caution. Prospective real estate investors need to factor in taxes, insurance, closing costs, maintenance costs, and any expenses they will incur from preparing the property for renters.
For repairs that will likely come up during a tenancy, experts suggest setting aside at least six months' worth of expenses to cover any major or minor issues. "I tell my clients to price out the cost of a new furnace, because that's probably the most expensive repair, and to make sure they have that in the bank," Evans says. "If you're a small investor, you don't want to have to dip into your personal savings."
Foreclosed or distressed properties can come with a whole other set of challenges. "With bank-owned properties, they're letting you low-ball a bit, but make sure you do your homework," Evans says. "Some of these homes have been shuttered for awhile," and could need significant investment to get the property up to snuff.
But investors shouldn't fixate only on costs. Myriad other factors contribute to the success or failure of real estate investing, such as location, proximity to public transportation and shopping, and employment availability. "When you're looking to buy for your primary residence, you're looking at things like curb appeal," Young says. "What you need to be looking at when you're buying for investment purposes when you're going to turn around and rent that property is how marketable it is as a rental property."
Underestimating the time commitment. Being a landlord isn't a hands-off activity. "I tell people to be prepared to plug your phone in next your bed," Evans says. In addition to maintaining livable conditions for tenants according to state and local ordinances, landlords should be prepared for the time it takes to find, screen, and close a rental contract with tenants.
Background and credit checks can also eat up time and money, so experts recommend setting aside a portion of monthly rent proceeds for miscellaneous management fees.
But while it might be challenging for newbie real estate investors to assume the role of landlord right away, you don't have to go it alone. Groups such as IREM and the National Association of Residential Property Managers can help you find a professional property manager to help with day-to-day management responsibilities. Many local communities also have associations to support landlords as well.
"Real estate investing can be profitable, rewarding and lead to a great career," Evans says. "But make sure you do your homework."