How to Avoid Losing Money on Rental Properties

fireIt can be very intimidating when buying your first house, whether it is your personal residence or an investment property.  If you do your homework and buy right, you can make a lot of money.  I am making at least 24% cash on cash return on my rental properties.  Here is a guide detailing my investment strategies, buying tips and detailed figures on my rentals.  You can also get burned if you buy the wrong house that may look like a great deal, but has bad bones.  Here are some tips to avoid disaster.

Major problems to avoid

The most common mistake I see, is an investor buying a house in really bad shape with major problems and underestimating the repairs needed.  If you are buying a home and you have the option, always get an inspection done by an inspector or a contractor you trust.  Even professionals like myself can miss major issues that an inspector will find.  Some issues that I stay away from are foundation issues, structural problems, major mold issues and Meth houses.  Not only are these repairs extremely expensive, it can be very hard to estimate how much the total cost may be,  as many times the full extent of the problem is not known until the repair is started.  These types of repairs also take a long time to fix, meaning you are spending more money on mortgage payments without any rent coming in.  If possible get bids from contractors for major repairs before you buy a property.

Repairs that aren’t as bad as they sound

Other repair issues sound nasty, but can be overcome if you do your research before buying the home. Frozen pipes are common in a foreclosure and can be a $200 fix or a $10,000 fix depending on the house and the severity.  Make sure you have a plumber check out the plumbing if you suspect there is an issue and get an estimate.

Minor mold issues can usually be remediated fairly inexpensively, but get an estimate and have a professional make sure there is not more mold hiding behind the walls.  Also make sure you find the cause of the mold before you buy, it could be a minor leak that was fixed or a major foundation issue where water is seeping through the walls.

Most electrical issues can be repaired easily by an electrician, but watch out for aluminum wires, old wiring or homeowner jobs that are not up to code.  Not only can these be very expensive to fix, but they can cause a fire.  The first priority in renting out property is making sure the home is safe for the renters.

Age of a home

I try to avoid buying homes built prior to 1960.  There are a lot of great older homes, but there is also a much better chance of those homes needing major repairs and eating away all your cash.  You also have to worry about lead based paint on any house built prior to 1978.  Any contractor disturbing lead based paint must be certified to perform the work, so be careful who is making repairs on your older homes.  The government can fine your contractor 10’s of thousands of dollars if lead based paint is disturbed and not removed properly.

Time it takes to make repairs

Not only can repairs themselves be very costly, but each day you are making repairs you are losing money.  If a home is being repaired, it is not being rented or making any money.  Every day, costs the owner interest on their loan, utility costs, insurance and lost income.  If you are going to buy a home that needs a lot of repairs, make sure you figure these extra carrying costs into your total cost estimates.

Over estimate cost of repairs

No matter how many properties I repair, the cost is always more than I think it will be.  Either the contractors raise their prices, the contractors find more repairs than I thought there would be, or it takes longer to make repairs.  It is always best to over estimate the cost of repairs.

Conclusion

The best way to start buying rental properties, is to buy a home that needs minimal cosmetic repairs that you can fix up easily and quickly.  Always get estimates on repairs, before you buy the home and add a few thousand dollars to your estimates for unexpected repairs that always seem to come up.  If your only option is to buy an older home that needs a lot of work, make sure you get as many estimates as possible account for the time it will take.

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