The Real Estate Investing Authority®

Avoid The Mistakes Others Make When Buying Investment Property

TOP 3 MISTAKES REAL ESTATE INVESTORS MAKE WHEN BUYING INVESTMENT PROPERTY

Like anything else, an infrastructure of expectations has been built around buying property that seemingly makes life easier for investors by streamlining the process. The more cookie-cutter like, the more comfort, and comfort is essential when we’re talking about investments of several hundred thousand dollars. That all makes sense. But, social proof is a real thing and when given the option our natural inclination is to do what everyone else typically does, without thinking twice.

 

Nexus Property Management® wants to challenge the conventional wisdom when it comes to buying investment property. Here are three areas where you can buck common trends to create more value for yourself and your tenants.

 

 

1. HOME INSPECTIONS

Spending money on a home inspection is a poor use of your resources. Before settling on the specifics around a buying price, it is customary to have a home inspection done. For a couple thousand dollars you hire someone to look over the property to indicate what items may be out of date or in need of repair. They’ll look at the roof, the siding, the chimney, the water heater, the heating system, the electrical system, possibly the major appliances, and they’ll create a report along with pictures of each item they inspected. But the truth is, you don’t need it.

 

You don’t need it because you could do it yourself. With very little education or expertise, you are fully capable of looking at the same items and drawing your own conclusions. You can take pictures and come to your own conclusions by observing or testing the components of the house you aim to buy. It’s that simple. If anything looks suspect, bring it up as a concern when ironing out price and work needed, just as you would had a formal inspection been done. The primary objective of the inspection is to identify additional expenses to either be negotiated or addressed down the road. No offense to the inspectors out there, but you can do that on your own.

 

Home Inspections As Ice Cream Cone

The weather is getting warmer so let’s go with an ice cream analogy to finish up the point: When you order ice cream in a sugar cone it will often come with a funny little paper wrapped around it. The Home Inspection is that paper wrapper. Yes, it might save some drips from falling out of the bottom and onto your lap unexpectedly…but, you could just as easily grab a napkin yourself and be on the lookout.

 

 

[LEARN MORE: BE WARY OF INSPECTIONS FOR INFORMATIONAL PURPOSES ONLY]

 

2. INSURANCE

Yes…you absolutely need insurance. This is not something you can do yourself. But, you do want to be active and intentional in deciding how much insurance you need for your property. There are a couple major options out there and understanding them can once again help you best direct your resources to where they’ll provide the greatest value.

At the top, you can insure your property for full replacement cost. The easy way to think of this is that this will provide you the amount needed to fully replace the property should it burn to the ground. This can be expensive and can increase over time as the value of the property rises or if building material prices increase (as we’ve seen recently). You might buy a four unit property for $300,000 but end up paying a replacement cost of closer to $500,000. Some people might want this amount of comfort, but statistically it doesn’t make sense. It’s very unlikely that properties will be destroyed and need full replacement. The reality is that it’s just way more ice cream than you need.

Ice Cream and Insurance

Instead, insure the property for the purchase price. To use the example from above, insuring at 300K is going to me much more affordable than at 500K. A third option is to insure just the loan amount. Either way, you’re decreasing the premium you need to pay so you can allocate those funds in a way that more directly improves the lives of your tenants. Should an unexpected tragedy occur and your property burns to the ground, you’ll still receive a substantial amount so you can pay off your lender, sell the land, and invest elsewhere. Keep in mind insuring for lesser amounts may result in partial claim payouts.

 

[LEARN MORE: MORE ON TAX ASSESSMENTS AND PROPERTY VALUATION]

 

3. WORRYING ABOUT QUALITY OF TENANTS

It’s very common when thinking about buying an investment property to ask about the tenants who currently live there. Guess what? It doesn’t matter.

 

“Are they good tenants?”, “How long have they been there?”, “Do they pay on time?” Like with the previous two topics, favorable responses to those questions will bring you a bit more comfort, but in the grand scheme of things, it doesn’t really matter.

 

The hard truth as a property investor is that everyone is going to leave at some point. What is most important is the location and the condition of the property. It would be ideal for tenants to stick around for the long term, and most will if you are an active landlord that values the property and the people who live there, but the tenants that initially come with the property should have zero bearing on your interest in a property. As the old Kevin Costner flick spells out, “If you build it (by adding value), they will come (and stick around for a while).” Don’t let the incumbent tenants scare you away from a good opportunity.

 

[LEARN MORE: DON’T MESS AROUND: PERFORM BACKGROUND CHECKS FOR ALL TENANTS YOU PLACE]

 

SPEAKING OF COMFORT…BUY SOME NEW APPLIANCES

So there you have it. Paying someone a couple thousand dollars to perform a home inspection will make you feel more comfortable, but it won’t add much value to your property. Similarly, insuring your property more than is necessary might help you sleep better at night, but it’s money wasted unless lightning strikes. And it might feel good to buy a property with nice, reputable tenants already included, but this would just be a shorterm win and that comfort would be short-lived when compared with the length of your mortgage.

 

The common theme is that these things make YOU, the property owner, MORE COMFORTABLE. But the most successful investors spend their time and money worrying about the COMFORT OF THEIR TENANTS. A great, and affordable way to add to their living experience is to replace kitchen appliances. Kitchens are the centerpiece of most units. They’re commonly where the entrance is and they get more use than other rooms in an apartment. A brand new stainless steel fridge or oven range adds significant value…and you can easily cover the costs…that is, if you don’t waste money on an unnecessary home inspection and/or you rethink your approach to insurance.

 

[LEARN MORE: EXPLORE OTHER RECENT ARTICLES FROM NEXUS PROPERTY MANAGEMENT®]

 

WHAT OTHER PEOPLE ARE READING:

1.    IS IT WORTH IMPROVING THE EXTERIOR OF YOUR RENTAL PROPERTY?

2.    HOW TO HIRE THE BEST PROPERTY MANAGER

3.    THE BEST TIME TO SELL YOUR PROPERTY

 

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Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.

 

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