Avoid The Four Wrongs of Real Estate

The Four Wrongs of Real Estate

There is no more polarizing issue in the personal finance community than real estate.  For every land lording success story, there is an equally compelling sob story.  Although few would claim that property ownership has no place in wealth generation, there are a number who won’t touch this asset class with a ten foot pole.  The undeniable truth is that real estate has two major benefits that are hard to deny.  For one, it can be an incredibly inefficient market.  Good deals are out there to be found.  For another, it is one of the few asset classes that is truly uncorrelated from the stock market.  You just don’t get this same diversification from REITs.  Whether, condos, single family homes, or multi-unit buildings, there are profits to be made.  But you not only will make nothing, but also lose if you become a victim of the four wrongs of real estate.

Don’t let this happen to you.  It is not rocket science, but requires a little forethought and effort.

Wrong Property

There is no substitute for buying the right property.  Time and again, amateur investors don’t put enough thought and effort into doing due diligence in the first place.  Of the four wrongs of real estate, this one can really bite you in the back of the pants.

The property needs to be physically sound.  That means hiring a top-notch home inspector to evaluate every nook and cranny.  You want the guy who has the biggest reputation for breaking up deals.  You need to be aware of any weakness in the foundation, insufficiency in the roof, and loose screw in the furnace.  The more you know the better.  Although you may decide to still buy a faulty property, you will know the scope and cost of work required.

The property needs to be fiscally sound.  Whether you calculate the cap rate or are an adherent to the 1% rule,  you have to run the numbers.  This is a rather exact science.  if you read a few blogs and peruse a few books you should be able to get the hang of it.

Wrong Location

Location means everything.  No matter how good a property is, it’s worth nothing if you can’t rent it.  So you need to understand the neighborhood.  Of the four wrongs of real estate, this is the one most overlooked.  An investor sees dollar signs and doesn’t realize that he got such a good deal for a reason.

Is the block crime infested?  Is the neighborhood decaying and unlikely to attract good paying tenants?  Has the area gone from hot to not and properties are going unrented?

Often perspective landlords forget to spend some time at the property before buying.  They miss the train tracks half a block away that disrupts the quiet, or the water purification facility that makes the neighborhood smell.

Wrong Tenant

This is so important.  Do your due diligence people.  Credit check, background check, and a call to previous landlord is the minimum.  I often make perspective tenants send me pay stubs and bank statements also.  You can’t be too careful here.

When it comes to the four wrongs of real estate, this one can be the most devastating.  Getting a dead beat or destructive tenant can cause a world of economic and emotional stress.  Once they are in the unit, it can be very hard to get them out.  So be smart and do the detective work upfront (can you say Facebook stalking anyone?).

Wrong Expectations

It ain’t perfect.  Real estate, like any other business, can be down right lousy at times.  Units sit empty.  Pipes burst.  There is no way to know what unexpected pain is going to come your way.  So do yourself a favor.  Have a guy (or girl).

Retain a really good handyman and know a few stellar electricians and plumbers too.  It only is a problem if you have to think about it.  Get used to the idea that when something goes wrong, help is a speed dial away.  The money you spend for repairs will be well worth the hassle and worry.

Final Thoughts

Beware of the four wrongs of real estate.  Being a good landlord is a state of mind.  Get to know the property and neighborhood before you buy.  Weed out potential tenants by doing the proper due diligence.  And finally, manage expectations.

Real estate can be a lucrative investment and round out a nicely diversified portfolio.  But just like everything else, you have to spend a little time to learn what you are doing.