10 biggest mistakes of novice investors

4. Thinking you'll get those low mortgage rates you see on TV. Those are for owner-occupied homes, says Bob Walters, chief economist for Michigan-based Quicken Loans. Investment property is considered a riskier loan and you'll pay more in points and interest rates. Expect about an extra 1.5 points or half a percent more in interest rate. The credit standards also will be higher. "You don't need perfect credit," he says, "but if your credit is in the dumps, you won't get the loan." And you won't get many low-down or zero-down-payment offers, either.

5. Not prescreening tenants. New landlords can get very excited about prospective tenants who show up, take one look at the place, hand them a cash deposit, and want to move in that weekend. Don't do it, Hill says. When selecting renters make them fill out an application, and check their credit, employment and rental history before you take a dime from them. It's a much more expensive -- and potentially nasty -- headache to evict a bad tenant than to have a unit sit vacant for a couple of months.

6. Breaking your own rules. Landlords establish policies for good reasons. When they start ignoring those policies, they're headed for trouble. No pets means no pets. Don't ever let someone move in without a security deposit, and don't ignore collecting late fees.

7. Investing long-distance. Unless your rental property is in a spot you love to visit regularly, such as a lake or the beach, keep your rentals very close to home, say New York-based real estate attorney Neil Garfinkel. Otherwise, you'll eat up your profits by driving back and forth to manage the property or by paying someone to make repairs for you.

8. Paying too much for the property. If you're embarrassed to make a low-ball offer to a seller, don't invest in real estate, Hill says. Rental property owners generally work off a multiple of 100. That means that if you pay $100,000 for a unit, you need to collect $1,000 a month in rent to pay all the bills and have a decent profit margin. If you've done your homework, you'll know what your rental market will bear.

9. Not studying the competition. Why does the guy across the street fill his units the same day someone moves out and yours sits vacant for months? He might not be very picky about whom he rents to, but he also might have lower prices, have washers and dryers in his units, pay for lawn maintenance and trash pick-up, or have his building on a wireless network.

10. Being underinsured. Insurance on rental property goes beyond insuring the building against fire or a hurricane. You need to look at your own coverage for liability, Garfinkel says. If there's a loose railing and a tenant's child falls off a balcony or there is a burglary and a tenant says it's because you wouldn't install security alarms, you're likely to get sued.

-- Updated: July 21, 2005

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