In today’s article, we’re going to talk about the most common mistakes most real estate investors commit. These mistakes represent a big amount of money loss, that’s why we have to consider all the possible mistakes that we could commit when we are about to make an investment.
If you are just getting into real estate, or if you already have experience buying properties, this article will be very useful for you to avoid making mistakes when investing in the future. That’s why we’ve listed nine lethal mistakes that make real estate investors lose money.
We recommend that you take notes and take into account all the advice to invest in real estate that we will give you, and those mistakes that you should avoid when investing.
1. Not declaring their rent.
There are two types of financing:
- There are the residential ones
- The commercial ones
The commercial ones need LLCs, the financing of these is actually based on the income off the property, but if you’re applying for a regular or a traditional residential mortgage, chances are you will typically get approved based on the income that you declare in your taxes.
For example, you made $50,000 a year. So, depending on your FICO score, depending on your debt-to-income ratio, chances are you are either going to get approved three times your income or four times your income. If you get approved three times the declared income, you are going to get just about $150,000.
Let’s pretend you are getting a total annual income of $70,000, so that is how much you’re declaring. $50.000 is coming from your job and $20.000 is coming from your rental income.
With these numbers you could get approved $210,000 by just simply declaring your rental income. That means you’re getting access to an additional $60,000.
Of course, you’re losing money whenever you’re not declaring. That means that your potential to expand your real estate portfolio, to get more money approved, so you can invest in real estate gets limited.
2. Not having credit.
Think about the real meaning of what credit is. Credit, it’s a bridge. It helps you get from point A to point B financially. If you would like to pursue the real estate investing route, and you only have $20,000 from your savings, $20,000 might not get you much in terms of buying a property cash, but if you have credit built, that quantity can be the down payment of a property that is worth $100,000, or depending on the type of mortgages, could even reach a $200,000 property.
This way, you can grow a lot faster as if you were saving money for the next 5 or 10 years. You would rather have access to the capital today. That’s something that credit grants you access to. When you don’t have credit, then you’re losing money too, because you’re not having access to financing.
3. Raising rents way too much.
There’s a reason why we have different types of demographics, and we have different types of neighborhoods. Some neighborhoods demand a certain amount of rent.
Let’s compare some of the three ranges of neighborhoods:
- Low income
- Middle income
- High class
On the low income side, you could rent the house and demand $900 for rent for a two-bedroom apartment. For that, the kitchen needs to be a modern kitchen, it has to have very nice bathrooms, and make everything look spotless and extremely nice for people to really want to live there.
If you decide to charge $1,200 on a low income family, the family could try to do their very best to keep up with the rental payments, but you could find problems renewing the lease and you won’t get the chance to renew your rent.
Always respect the market, always respect the signs that you’re getting from the market. Do your market research, do your due diligence, do not over push it just so you can get it an extra $50.
4. Investing in properties with negative cash flow.
Cash flow simply means the money that is left after all expenses are paid. You collect the rent, and then you cover the mortgage, you pay for utilities, your property management fees, and stuff like that. And after those payments, you have to have some type of money left. That’s your cash flow.
Under this situation of pandemic, a lot of investors are collecting their rent but that is not enough to cover for the mortgage payment. As a result, they have to put money out of their pocket, they have to work extra jobs.
What happens if you cannot even afford to cover the mortgage payment? always make sure that whatever you get will give you a positive cash flow so that you can stack money aside as a reserve in the event something happens down the line.
5. Not having insurance.
Why is having insurance so important? Because you lose money when you don’t have insurance. Why? Because things happen, accidents happen, a pipe can break, something can break in the bathroom, there’s a leak, or any other accident.
If you don’t have insurance, things are going to have to come up with your pocket. If you have to repair something, you can’t just hope for your tenant to solve it and to be okay with it.
Otherwise, you are either going to get sued, which is also going to cost you money, or simply the damage is going to continue to expand.
You can buy insurance that covers rental loss in the event that an accident happens and that’s going to help you cover the mortgage payment, and then buy you some extra time to recover from that hard time.
6. Not having backup materials.
You always have to take into consideration the building materials for renovations or just to fix something. This way, when something happens, that shouldn’t be a problem because you have backup materials for that.
If you are never ready for these kind of situations, you’re going to have to hire somebody who’s going to do the tiling work for you and that will cost you money and time.
7. Don’t forget about invoices
Most people forget to save their invoices and give them to their accountant. This is extremely necessary, and it’s very important tax-wise.
For example, let’s pretend you make on average $20,000 in rental revenue. Between fixing a bathroom tile, and hiring somebody who can come in, and put the tile all together and make it look nice, you end up spending somewhere between $5,000.
That $5,000 worth of receipt is going to reduce your taxable income, meaning that now, instead of paying taxes on $20,000, you are actually paying taxes on $15,000. That definitely reduces your taxable income. Which one would you rather do? Pay taxes on $15,000 or pay taxes on $20,000?
8. Not having an accountant.
Why is having an accountant that important? Because you’re not an expert. You are not familiar with the IRS rules. There’s a reason why accountants exist. They specialize in accounting and they know all the regulations.
Make sure that the accountant also work with real estate investors, or that they specialize in real estate accounting because they’re going to make sure that your depreciation is taken care of and your 1031 is taken care of, and at the same time, you will look lendable to any institution when the time comes to expand your real estate portfolio.
9. Not having asset protection.
You have to look on paper as if you had nothing. The reason why is because you want to avoid lawsuits. Having your business protected by a LLC is essential to build a stable business and that will protect you from losing money and having to deal with lawsuits.
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