2 . Overleveraging and Poor Financial Planning
What to Do : Maintain a conservative debttoequity ratio and have substantial cash reserves . This includes :
Budgeting for Contingencies or Whoops factor : Set aside funds for unexpected repairs or vacancies .
Creating a Financial Plan : Include investment goals , cash flow projections , and exit strategies . Make sure to find out the cost of a refresh in your area .
3 . Ignoring Property Management :
What to Do : Either manage properties efficiently yourself or hire a reputable property management company . Key responsibilities include :
Tenant Screening : Conduct thorough background and credit checks .
4 . Skimping on Due Diligence
What to Do : Perform your due diligence before purchasing and use professionals even if not required in your state . This includes :
Property Inspections : Hire professional inspectors to check for structural issues , pest infestations , and compliance with safety regulations .
Hire Attorney to Perform Legal Checks : Ensure there are no liens , easements , or zoning problems .
Mistake : Overleveraging can lead to financial ruin if the market shifts or unexpected expenses arise , leaving you unable to service debt or cover costs .
Story : The real estate market will not go up forever . I learned this lesson the hard way during the 20082010 housing market crash . Instead of taking profits along the way by selling off some of our properties , we were caught in the downturn . We lost a few properties and had to sell others at a loss . This experience underscored the necessity of maintaining a healthy balance between debt and equity .
Pro Tip : I typically have my client ' s people set aside or keep a reserve of 1 % of the purchase price or 10 % of the rehab budget , whichever is higher when fixing a property . You should also have threeexit strategies and not just one for each of your properties .
Rent Collection : Implement a reliable system for ontime payments .
Maintenance : Regular inspections and prompt repairs to maintain property value .
Mistake : Poor management leads to high tenant turnover , property degradation , and loss of rental income .
Story : I have lots of my clients and students who have had bad experiences because of not doing proper screening on their tenants . The least of your concern is the tenant not paying rent for six to nine months . One couple that I coach wanted to be nice to their tenant and listen to a local attorney who said , “ The tenant would leave after a few notices .” It had already been several months of late rent and not paying in full when they engaged the attorney . Well six months later , they finally listened to me and got the eviction process started . The tenant fought it but did move out when the sheriff finally showed up to evict them . Sometimes we have to make a hard choice .
Surveying : Verify property boundaries and land use restrictions .
Mistake : Failing to uncover these issues can result in costly legal battles , unexpected repair expenses , or inability to use the property as intended .
Story : This is one of the biggest things that my clients and students want to push back on in states where attorneys are not required to purchase a property . Do not be CHEAP as there are lots of horry stories . I would much rather pay an attorney $ 750 to $ 1,500 to do a closing than find an issue later the cost $ 20,000 to $ 100,000 + to fix . Or , even worse , an EPA issue . I was just talking with someone buying their own home that had asbestos only in their floor . Anything EPA related will most likely cost 25 %+ more than you expected and take 30 to 90 days longer to fix than you planned . So , be prepared . The government does not move fast .
Pro Tip : Don ’ t be cheap and make sure to do background checks on your tenants .
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