Buying cash flow real estate to hold is one of the best strategies in many areas in today’s market. However, there are many challenges and mistakes that can be made especially with beginners. Here are 4 things to avoid when buying cash flow real estate.
- Leave out management, vacancy and maintenance in calculating cash flow – I see it all the time. Rent – PITI is used to calculate positive cash flow. If you do not have room for at least 10% property management, 10% vacancy and 10% maintenance then you could end up losing money over time. It is much more accurate to take 70% of Rent – PITI to calculate positive cash flow.
- Owner manage and/or get crummy managers – Many do it yourselfers choose to manage properties themselves and they have no idea what they are doing. Tenants walk all over them, do not pay rent, trash the place and it can all be avoided by obtaining good property managers. Do not be afraid to pay your managers well, they will allow you to sit back and generate passive income and look for more profitable deals.
- Too many upgrades – Do not over do it with upgrades for rentals. You are not living in the home or flipping the home. Only do upgrades that will increase rent, get tenants faster and stay longer or prevent more costly upgrades. I see it all the time though when people say “I just wanted to make the upgrade so I don’t have to worry about it”. Well, they just threw money down the toilet. Do those upgrades right before you sell, not before you rent.
- Buy something they would live in or right near their home – This one is awesome. I have friends call me all the time and say “There is a foreclosure right down the street that would be an awesome rental”. I try not to laugh and ask them about the property, rent and details. Usually the numbers are terrible for rentals but most people are more comfortable investing in their neighborhood so I understand why they do it. But I do not agree with it. Buy a cash flow deal because the numbers make sense and you have multiple exit strategies, not because you are comfortable and do not involve emotions. If you say you like it, you better be talking about the numbers and exits.