Almost all investors lose money on real estate. Here are the main mistakes
Seemingly investing in real estate sounds like a pure win. You have liquid assets that gain value. Who wouldn't want it? However, this is not a passive income and does not always bring profit.
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A study recently conducted by Clever Real Estate, an educational platform and a brokering platform, showed that 90 percent From 764 American respondents declared that they had lost money on residential real estate, and as much as 42 percent. of them lost over 200,000 hole.
Whitney Dutton, director of sales of residential real estate at Native Realty in southern Florida, says that the popularity of programs that show flipping with real estate popularized the idea of investing. In fact, this is not for everyone: when you are the owner of the property, you cannot control many unforeseen events, and if you have little experience, you will not be prepared for them.
Daniel Cabrera, founder of Sell My House Fast, told Business Insider that he was the owner of several properties for rent, before he got rid of them in 2017.
“I had a full -time job then and I even had a real estate manager,” said Cabrera. – Despite this, the property manager called me every other day. Something was wrong with this house, and then something was wrong with the next house that had to be dealt with. It came to the point that I spent 20-25 hours a week on something that was supposed to be a passive income He added.
Cabrera is no exception: approx. 29 percent respondents stated that he regrets buying investment real estate because he must deal with maintenance, cleaning and maintenance.
Below is a Clever survey table containing the full spectrum of the biggest ills of investors.
| Failures of people investing in real estate | Percentage of indications (respondents could indicate more than one answer) |
|---|---|
|
Problems with dishonest tenants |
51 percent |
|
Losing money |
39 percent |
|
Overflow for the property |
33 percent |
|
Long periods without tenants |
31 percent |
|
Choosing a bad location |
31 percent |
|
Insufficient verification of tenants |
30 percent |
|
Too much maintenance |
29 percent |
|
Real estate management |
27 percent |
|
Determining the wrong rent rates |
27 percent |
|
Legal issues related to real estate and tenants |
25 percent |
|
Employment of the wrong service providers |
25 percent |
|
Lack of sufficient knowledge about investing |
24 percent |
In the first place there are problems with dishonest tenants. One of the main reasons in such a situation is often inaccurate checking of people, which is also mentioned as one of the biggest mistakes.
Cabrera, who currently buys and sells houses in San Antonio, offers cash to buyers who want to quickly close the transaction. He estimates that about 1/3 of the property he buys is a failed rent. “They rented and did not carry out the tenant's proper inspection,” he said. “The tenant broke the house, and now they do not want to deal with this problem and are willing to sell it with a discount, just to get rid of the problem,” he explained.
Sometimes even maintaining due diligence does not guarantee a good result. Shelby Johnson, a veteran of the American army, who became an investor on the real estate market, claims that you can find an inappropriate tenant, even if she looks great on paper.
Johnson recently applied for the eviction of one of his tenants after he did not settle the payment. The property management company, which supervises its premises, previously checked the creditworthiness and income requirements, but at some point the tenant stopped paying the rent and did not allow control. It took about 30 days to remove the tenant, but before Johnson regained his premises, the damage was $ 7,000.
– Many people think that they will buy several real estate for rent and will simply live from the cash flow Johnson said. – They have a really fabulous idea of what being an investor is, but the reality of investing is that one bad tenant, one bad contract can cost you thousands of dollars, which sometimes translates into a few years of profit She added.
She added that the general rule is to achieve monthly cash flows of $ 200. for the premises, which translates into $ 2,300. annually. In this case, recovering the amount lost as a result of the aforementioned incident would take almost three years without any other factors, such as delays in payments, no tenants or repair.
See also: They buy houses in Spain and do not think about the future. Expert: Too little reaches investors
For Johnson, the evictions of tenants are not uncommon. It has 45 apartments for rent in North Carolina and in the last 12 months had to evict six tenants. At some point she had 74 premises for rent, but since then she got rid of the least profitable ones.
Whitney Dutton says that even property owners trying to get rid of the problem can lose money in this process. If the tenant does not agree to sell, he may not allow the presentation of the premises or refuse to cooperate during the inspection. This may delay sales, cause that the transaction will not take place, and even lead to a significant decrease in the value of the property.
Johnson recommends buying multi -family properties with at least two apartments instead of more expensive single -family houses. In this way, if one unit loses money for any reason, the other units will continue to generate revenues. He also recommends putting $ 5,000. in cash for emergency situations.
The study showed that overpaying for the property is another reason for regret. Daniel Cabrera noticed that this often happens when potential buyers have been analyzing comparative data from a better period on the market, e.g. from nine months to a year earlier, when the values were higher. Buyers sometimes do not realize that a few months may mean the difference between the buyer and the seller market. Buyers should also pay attention to whether they make purchases during the housing bubble when the prices are the highest.
When it comes to considerations regarding the location of investment real estate, Dutton noticed that one of the largest expenses that buyers in the US often omit, especially in places such as southern Florida, there are real estate taxes. There, the value of houses increased by 30-50 percent, and annual property taxes for investment properties change depending on these increases. The principles may vary depending on the state and the county. In southern Florida, investment real estate is taxed percentage from value, but this value is updated every year and may increase by up to 10 percent. annually.
“In Florida we have noticed the largest leap of sales prices throughout the country,” said Dutton. – So when people came and bought real estate for X and they thought: “Oh great, now my property is worth twice as much”, well, it's great if you recover your money. However, if not, your expenses will also increase. And when rents can't keep up with it, you are now staying with a deficit – he added.
Another tax error made by buyers is to compare the current property tax and assume that they will pay the same amount. Dutton, however, notes that, depending on the provisions in force in a given area, the amount of tax will correspond to the purchase price.
Underestimating the cost of real estate insurance is another mistake. This expense can also be significant depending on the location. For example, in Florida there are many cases of damage to property caused by water and hurricanes. These problems led to many insurers to completely leave the market. Insurance companies that are still willing to provide insurance have doubled and even tripled their prices.
Local regulations are another factor. Some states have more friendly regulations for landlords, while others have strong regulations protecting tenants.
In the case of Johnson, the tenant's eviction took about 30 days. However, in the case of Chrissa Grigoropoulus, who bought a house with six bedrooms in the New York's Nassau, the eviction process can be expensive and last over a year. When she took over the property, the tenants refused to leave her. Due to the strict regulations regarding tenants in force in New York, Grigoropoulus had to resort to the non -legal solution and negotiated directly with the tenant.
“In general, in New York, especially in five districts, court disputes between the landlord and the tenant are very difficult,” said Grigoropoulus. “In many cases, tenants have more rights than the owners could dream, regardless of whether they pay or not,” she added.
The above text is a translation with American Business Insider edition
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