Top 3 WORST Rental Property Investment Mistakes to AVOID

Are you considering real estate but want to avoid making mistakes and potentially losing thousands of dollars? 

Look, when I was considering buying a rental property, I wanted to make sure that I made the right decisions. I wanted the cash flow. I wanted good tenants. I wanted to buy it in the right areas so that I could get some sweet sweet appreciation. 

Basically… I just wanted a safe investment. And I bet you do too. 

That’s why, in this video, I’m going to teach you the top three mistakes that people make when buying a rental property. 

Before we get into it, let’s get the boring crap out of the way. Go ahead and like and subscribe to my channel. It really helps me out and I’ll love you forever. 

And let me know in the comments below – what scares you the most about investing in real estate? Tenants? Money? Debt? Let me know.

Mistake 1: Trying to Time the Market

We ALL want to buy at the bottom of the market and ride the wave up. Most people sit on the sidelines for YEARS and never invest because it’s “not the right time.”

But not you. You take action. You realize that it’s never the “right time” to buy a rental property. Because things will never align perfectly. 

Technically, we were supposed to have a crash in 2018 because all of the real estate cycles follow a 10-year cycle. Aaaannnnd we ain’t crashed yet. 

And who knows when the crash will come? We could be in it now or the FED could keep printing money and prop up the economy for another decade. 

So, don’t sit on the sidelines waiting for the right moment to buy a rental property. 

But if you want to make sure that you are buying the best investment possible to protect yourself, then it’s important to know how to run the numbers.

Which leads us to our next topic…

Mistake 2: Failing to Calculate Cash Flow Accurately

You won’t make money by timing the market. So what should you do instead?

Make sure that you are getting good deals on properties so that you can cash flow enough. 

When analyzing a rental property in an up market, it gets harder and harder to find good deals. 

This makes it very frustrating when you’re buying a rental property because the amount of effort it takes to find a good deal is ridiculous. 

This frustration leads many investors to just settling for a deal that’s “good enough.”

Buying thinner deals means that you put yourself at greater risks. 

So, how do you run numbers to make sure that your rental property is going to cash flow?

You need to take into account how much you need to set aside for repairs, maintenance, capital expenditures, vacancies, and management fees. 

So, let’s look at an example. 

Larry the landlord gets excited about a property that he finds and puts it under contract. He believes that he’s going to make $100 / month from this rental property. 

The problem is that he’s not taking into account property management fees. 

Maybe he’s thinking, “I’ll manage it myself. I don’t need  to account for property management fees.”

Alright, let’s look at a few scenarios here. What happens if he has to move out of state for a new job? What if he becomes ill and can no longer manage it? What if he’s super successful and ends up buying 30 rental properties? 

No matter the scenario, he gonna be forced to hire a property manager – that’s what happens. 

But even if you are accounting for property management fees, make sure you you’re not fudging the percentages. 

It’s common for people to just throw 10% at property management fees because that’s what they charge us each month. 

But, that doesn’ take into account the cost of the placement fees that they charge you when they place a tenant into your property. 

If your tenants move out every year, your REAL property management fees are going to be 18% each year, not 10%. 

When you’re analyzing rental properties, a good rule of thumb for analyzing rental properties is the 50% rule. 

The 50% rule states that 50% of your monthly rental income will go towards expenses. 

Let’s assume that your property rents for $2,000 per month. The 50% rule states that half of this will be spent on rental property expenses. So, we can expect to see $1,000 go towards expenses each month. 

Now that we have set aside $1,000 for expenses, we have another $1,000 leftover to make our mortgage payment. Let’s assume that our mortgage payment is $700 on this property. 

If we subtract our $700 mortgage payment from our remaining rental income, we are left with $300 in cash flow. 

A disclaimer is that the 50% rule is not the end all be all, but it provides you with a very each formula to analyze a large number of rental properties. 

This leads us to our third mistake that real estate investors make and that’s…

Mistake 3: Failing to Budget for the Unexpected

Literally, every single time I hire a contractor, the renovations always go over budget. 

Miscalculating renovations can leave you with zero profits for years. 

On one of our single family homes that we own, our property management company had to do $8,000 in repairs after a crappy tenant moved out. 

Our new tenant is paying $1,600 per month in rent while our mortgage payment is $800, which leaves us with $800 that goes towards paying down the balance I have with my property manager. 

It’s going to take me 10 months just to break even on our rental property this year. 

That’s showbiz baby. 

So, what can you do to make sure that you’re not getting hammered by the costs of unexpected repairs?

When you need to have some work done on the property, get quotes from 3 or more contractors. 

Make sure that you have them give you an itemized list of the repairs that they are quoting you for. 

You don’t know how many times I’ve heard, “Yeah, but I didn’t quote you for that.” When I’m asking about a random charge. 

Have your contractors quote the timeframe that it will take to perform the work on your rental property. 

I’ve had contractors work side jobs for my neighbors while they were supposed to be working on my house. In one instance, this made a 4-week job turn into a 3-month job. 

When this happens, you’ll be the one who has to pay the mortgage while your property is vacant. 

Another way to make sure that unexpected repairs don’t crush you is to set aside 5%-10% of your rental income each month. 

Hint: You should already be saving 30% of your rental income for repairs, maintenance, and cap-ex. Make sure that you are not dipping into these savings accounts. 

Guys, the bottom line is that you’re going to screw up. Just buy The Book on Real Estate Investing by Brandon Turner and follow exactly what he says.

If you follow his formula for buying the right property, then you will be successful.