To survive in the Real Estate game long term can be a daunting challenge. It requires the attributes of patience, persistence, and discipline, which is at odds with the instant gratification culture of today. There are many people who have tried investing in Real Estate and failed. Below are 3 common pitfalls that new Real Estate Investors make:
1. Prioritizing Location over Cash Flow
The term location, location, location is said often in the Real Estate Business. While location is a very important consideration, do not prioritize it over cash flow. None of us have a crystal ball to look into the future and if the market goes south you want to be able to weather the storm, and not pay out of pocket to support a property. In nominal terms the average house prices between 1989 and 1996 fell by 23% in Toronto, while in real terms it fell by whopping 40%.
Ensure you have and maintain a proper maintenance reserve for your properties at all times. The furnace that you expect to last two years may last only two months. A common recommendation is to have at least 6 months of carrying costs in reserves, but if you are just starting out and have one or two rentals I’d recommend having 12 months and ensuring you have adequate insurance coverage in case of fire or flood etc. Overall the six month rule is good, but when you’re dealing with one or two properties a little bad luck could put you out of business. Imagine both the roof and the furnace need to be replaced in the one rental property you own. These large ticket items plus other maintenance could easily exceed 6-months of carrying costs.
3. Rushing to Rent
Be patient when selecting tenants and beware of desperate renters. If someone can move into your property within a week, how much notice will they give you? A desperate renter could indicate other signs of trouble, such as eviction. It is better to wait a month or two for the right tenant than renting a place quickly for the sake of having it rented. In Ontario it can take 6-months or longer to evict a tenant, and provincial laws prohibit taking security deposits to cover damages.