3. Not putting enough money in reserves
For investment properties, lenders generally want to see at least six months’ worth of expenses in reserves, including principal, interest, taxes, insurance, and any HOA dues. If your total monthly payment is $2,000, you’ll need to have $12,000 in the bank on top of your down payment and closing costs. I hadn’t planned for this when buying my first property and ended up having to set aside more cash than I anticipated.
The point is that having a down payment by itself isn’t enough to qualify for an investment property mortgage. Requirements vary by lender, so ask what yours will want to see before you start making offers.
4. Being unprepared for repair costs
Remember back in the first section when I mentioned that a tenant moved out and left $8,000 worth of damage? When I initially viewed the property, I wasn’t allowed inside that unit. And to be fair, the excuse made sense -- the tenant was a nurse who worked nights, so nobody was allowed to see the unit during the day. Even my home inspector couldn’t get in, but since the property was an as-is sale, I didn’t think it was that big of a deal.
I was wrong. I could have pushed to view it at night, but I lived about an hour away from the property and didn’t bother. After all, the listing agent told me that it was "essentially the same" as the other two.
Well, it had two bedrooms and two bathrooms just like the others, but that’s where the similarities ended. My property manager said that the tenant had packed up and left shortly before closing, and I immediately understood why. The place was in such terrible shape that I can’t see how anyone lived there at all.
There was a cat urine odor combined with some other unidentifiable stenches that made the smell of subway station restrooms seem appealing. The carpet was so disgusting I couldn’t tell what its original color was, and the kitchen, toilets, and tubs all had layers of grime that must have been a quarter-inch thick. And before I took three steps inside, my legs were covered with fleas up to my knees from an out-of-control infestation.
We knew before closing that the home needed a new roof, but we were blindsided when two of the three water heaters stopped working shortly after closing. The $8,000 in repairs to one unit was simply not something I’d budgeted for.
- Never close on a rental property without being able to visually inspect all rental units, no matter what you’re told, unless you’re planning on a complete renovation.
- Budget for the repairs you could need within the next year or two, not just what the property needs today.
5. Not knowing peak rental season
My triplex is located in a trendy neighborhood about two miles from the University of South Carolina campus, so it’s fair to say that the units are likely to appeal to college students more than anyone else.
Here’s one thing I didn’t think of: College students like to secure housing for the upcoming school year in June and July. Some will go into August. Well, I closed on the property in mid-July, but the extensive renovations weren’t done until the third week of August. By then, school was back in session and virtually all college students had found places to live.
As a result, we had to not only lower our asking rent, but give new tenants half-off their first month’s rent just to get the units occupied. If the apartments had been on the market a few weeks prior, it wouldn’t have been necessary. I’m not saying anything would have changed with the timetable -- but it would have helped with planning if I had anticipated it.
Learn from others’ mistakes -- as well as your own
I’m telling you all of this not to turn you off from the idea of real estate investing, but to get you to anticipate a learning curve when you get started. Hopefully, you can learn something from my mistakes, but you’ll make a few of your own along the way, too.
The main characteristic that separates successful long-term real estate investors from those who crash and burn is learning from the mistakes they and others have made and using their newfound knowledge to get things right the next time.