Real estate has become the tech stock of the 2000s, the darling investment that everyone seems to think will be his ticket to easy wealth. And why shouldn't investors be snapping up cute little cottages? After all, mortgage rates are low and the housing market is hot. How hard could it be? Slap on a new coat of paint, put some flowers in pots by the front door, put a "For Rent" sign in the yard, and start counting the cash.
It's a popular notion. The National Association of Realtors reports that nearly a fourth of all the houses sold in 2004 went to investors; about 80 percent of investment properties are existing single family houses.
If they're looking for rental income -- and most investors are, according to the NAR -- buying a single-family house may be the first mistake. All it takes is for a property to sit vacant for a couple of months -- or a tenant to run out on the lease -- to put a new real estate investor in a financial bind. Far better to buy multifamily units, such as duplexes.
That way, you can live on one side and have the rent from the other side pay your mortgage. Or, rent out both sides and give yourself some breathing room in case one tenant moves in the middle of the night without paying his rent.
"I'm not a proponent of single-family units," says John Anthony, president of the Pennsylvania Association of Mortgage Brokers. "A first-time investor should look at (multifamily units of up to) four units to limit their risk."
If you're still convinced that investing in rental real estate is the road to riches, at least go into the proposition with your eyes, as well as your wallet, open. Here are 10 common mistakes made by new real estate investors:
1. Falling in love with the property.Stop thinking like a homeowner and start thinking like a business owner, says Robert J. Hill, a Nashville-based investor and author of " What No One Ever Tells You About Investing in Real Estate." Get emotional about the deal, not the house.
2. Not performing your due diligence.This is more than just an inspection of the property, although that's essential. (Can you say, "deferred maintenance costs"?) It's also a thorough investigation of your area's current rental market, says Gerald Marsden, a New York-based CPA who specializes in investment real estate. What are the vacancy rates and average rents for comparable units? What's the average age of the rental housing stock? How is the neighborhood zoned? What are the government regulations about rental properties? Has City Hall approved new rental complexes nearby?
3. Forgetting the rule of home improvements.It will always take three times the money and twice as long as you estimate to get a unit ready to rent. Or is that twice the money and three times longer? Either way, you need to build that extra cost into your expenses, Anthony says.