Real Estate Tips |9 min read

How to Buy Rental Property: 11 Real Estate Skills & Mistakes

When learning how to buy rental property units, you must learn to avoid common pitfalls, such as not using certain calculation formulas, forgetting location-specific factors, choosing the wrong property size, and other mistakes. Check out the real estate skills below to make sure your hard-earned money doesn’t get wasted!

Table of Contents

What to Avoid Before Buying a Property 

As experts in Baltimore hard money loans, we recommend that fellow real estate investors do the following as they learn how to buy a rental property:

Forgetting to Set Concrete Goals

Some real estate investors are so impatient to get started that they just jump right in without the proper preparation. However, this is actually the point when you need to slow down and carefully plan ahead. Otherwise, you won’t have a sturdy foundation to base your business on.

Before you look for houses, map out a detailed list of specific goals you want to meet when buying your property, including:

  • Which type of property do you plan on buying? For example, do you want a single-family home or a multi-family one?
  • Where do you want to buy property? For example, do you want to buy in a suburb or an urban area?
  • What do you plan on doing with the property? For example, do you want to buy and hold it? Do you want to immediately rent it out?
  • How should the property’s condition appear? Should it be a cheaper, dilapidated property for fix-and-flipping? Or, should it be a new, more expensive property?

Not Crunching the Numbers

It’s crucial to crunch your numbers before you commit to a potential investment. Before you pour all your time, energy, and expenses into your investment, make sure that it’s worth all that effort to begin with.

Real estate investors should calculate certain sums, including:

  • Gross Rent: Find your gross rent income before deducting expenses.
  • Cap Rate: Calculate your rental income after
  • 1% Rule: Your gross rent should equate to 1% of your overall purchase expenses.
  • 50% Rule: This rule approximates your Net Operating Income (NOI) as applied to 50% of your gross rent.
  • Hard Money Loan Costs Calculators: Use hard money loan calculators to keep track of your loan expenses.
  • Cash-on-Cash Return: Taking your down payment into account, see how much of it returns into your hands as cash.
  • Equity: Your equity is the difference between fair market value vs. your ownership stake in the property.
  • Pre-Tax Net Income: The income you have after going through funding costs.

These basic rules are essential real estate skills. They can give you solid, tangible evidence of a property’s profitability potential. This way, you can avoid getting thick in the weeds of properties that don’t serve your goals.

Not Thinking Like a Tenant

Always try to balance your own goals and needs with those of your tenants. You can accomplish this by trying to narrow down which types of tenants you want to lease out to, the types whose interests align with yours.

For instance, if you want to appeal to Gen Z renters, look for college towns. Or, if you want to offer high-end rentals, check to see if local rent prices match your goal rental rate. This way, you get what you want out of your investment while maintaining tenant satisfaction. Here are some other ways you must keep tenants in mind:

Ignoring Location-Specific Preferences

While tenants overall want the same basics, different locations attract different interests. It’s important to add the ability to pinpoint these as one of your core real estate skills. For example, if you’re choosing a warmer area, tenants may emphasize nearby access to beaches. Get a sense of which amenities tenants prioritize most in each location you consider investing in.

Focusing on Investing in Declining Areas

Worse-off areas may have better deals. However, although those conditions may benefit you now, they may come back to bite you later.

After all, most potential renters aren’t so desperate that they’ll set up shop anywhere they can get a home. They have choices. As such, they won’t want to live in an area that is rough around the edges. If you notice that things don’t look ideal, they will, too. And they’ll look elsewhere.

So, take notice of your target area’s streets, sidewalks, and nearby amenities. If these aren’t exactly pleasant to the eye, that’s a real estate red flag. In all likelihood, you’re going to struggle to find renters.

Furthermore, another key measure of a location’s quality is its quality-of-life-related ratings. For instance, what are the school ratings? Are the crime rates high? If your property is in areas with poor ratings across the board, tenants will be much less willing to live there.

Getting the Wrong Property Size

If your eyed property is too small and cramped, it could be lower in value. Also, it could deter families and people with roommates.

On the other hand, if your property is too big, your maintenance costs will balloon up in tandem. Also, it would increase the rental rate, which will dissuade renters with limited budgets.

Not Doing Enough Research

If you were to buy a car or a TV, you’d compare different models and price points. You’d investigate the little details to make sure each component fits your specific needs. A property is even pricier and more substantial than either of those purchases, so real estate investors should apply meticulous research on it.

Here are some fundamentals you should investigate:

  • Market Trends: Look out for local market trends and keep an eye out for potential housing bubbles that could burst.
  • Laws: Study local landlord-tenant laws, zoning requirements, and fair housing laws. All of these could impact your plans.

Not Doing a Thorough Inspection

No matter what, always undergo a thorough inspection of your property’s condition. Make sure it doesn’t have too many wall or ceiling cracks, or pest signs.

All of these are signs that the home is in disrepair and needs an extensive facelift. If you are interested in giving the house a facelift and boosting its value, that’s one option. However, if you were hoping to sell the house as-is, you might want to steer clear of this one.

Furthermore, no matter the home’s condition, real estate investors must always make sure it meets core regulations. More specifically, make sure it’s compliant with building codes, safety standards, and fire codes before renting it out to others. Needless to say, you don’t want to put your tenants in danger or discomfort.

Also, you or your property manager should undergo a move-in and move-out inspection when new tenants come around. This way, you can pinpoint any newfound concerns you need to address.

Things to Avoid After Your Purchase

Sorry to say, the real estate skills you must learn don’t end once you’re done with your home sale. Real estate investors must keep in mind the following best practices after they buy their property.

Not Accounting for Expenses

You want to be 100% sure you can afford your property investment before you sign away on it. This might sound glaringly obvious, but countless real estate investors really do bite on more than they can chew.

Your upfront fees aren’t the end of your responsibilities. In addition, you also need to factor in your loan, property maintenance costs, appliance repairs, taxes, insurance, and other factors that might pop up unexpectedly. If you don’t tack on these inevitable costs, you could find yourself bleeding money in the red.

So, to avoid this serious oversight, write down all the monthly expenses you expect to have with your property. If you’re leasing it out, you can add in the income to these expenses. Then, you can calculate your overall ROI and see if the property is meeting expectations.

Handling Everything Yourself

No matter how knowledgeable you are, no one is a solitary island. You can’t do absolutely everything all by yourself. After all, you can’t be a professionally trained contractor, lawyer, electrician, designer, and other roles, all at once. And even if you somehow were, it would suck up so much of your time that you couldn’t do anything else. Lesson here? Get help.

Leverage all the resources you possibly can to attain the best outcome. Develop a solid network of professionals, like home inspectors, property managers, attorneys, and insurance representatives.

By doing this, you can wield their specialized expertise to fill any gaps in your plans. This not only saves you lots of time, but it prevents you from going through mishaps and even legal issues you’d otherwise encounter.

Not Anticipating Vacancies

All real estate investors must anticipate that their properties will occasionally have vacancies. After all, you can never be too sure of when a tenant may unexpectedly come and go.

If you don’t add some leeway to your budget, you could wind up in a tight spot should a tenant suddenly break their lease. Hopefully, this shouldn’t happen too often. However, just in case, it’s a good idea to be ready for anything that comes your way.

Mistakes To Avoid Throughout the Whole Process

There’s one aspect of real estate skills that investors often overlook, but doing so is a fatal error. They get the wrong funding to base all their operations on.

Funding is the thread that binds your investment together. You need it to get all your ducks in a row and secure your purchase. Afterward, you need it to fund repairs, maintenance, and other tenant attraction and retention fundamentals.

That said, if you use the wrong funding plan for yourself, you could end up with insufficient funding. Even worse, you could be stranded with none, period, by the exact time you need it the most.

Regrettably, many investors find themselves in this impossible position at the final hour. This is because traditional bank loans aren’t designed appropriately for all real estate projects. Approval can take months, and many purchases are now-or-never ones. You can’t afford to waste time waiting because the deals will slip away.

In such time-sensitive cases, using a traditional loan can lead to failure before you’ve even truly gotten started. And it can even haunt you when you have the property to yourself. For instance, it could obstruct you if you don’t have cash reserves ready for renovations or emergency repairs.

To prevent these disasters, you should choose loans that are curated for your express purpose. It might be best to choose alternative loan types made especially for real estate investors, like hard money loans.

Hard money loans were created to offset the disadvantages that come with traditional loans. They’re crafted as expedited loans that arrive within weeks after approval. In addition, they are more customizable and flexible in terms of criteria than traditional loans.

If you want to get such loans from a small, local business, we are here to help. We have years of experience and connections in the Maryland real estate industry, so we can assist you every step of the way. Contact us today to get the customer service you deserve.

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