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I like to think I’m a pretty seasoned real estate investor, but that wasn’t always the case. Like most, I’ve learned quite a few lessons along the way. Here are three things in particular I wish I’d known before buying my first investment property so you hopefully can avoid them before you get started.
1. Don’t underestimate how much money you’ll need
One mistake I made before buying my first investment property was not leaving enough cash in the bank to deal with unforeseen expenses. My lender required a 20% down payment and six months’ worth of mortgage payments in reserve. But that was by no means enough.
For one thing, the property needed some significant repairs shortly after closing (which I knew about). These ate up most of the reserves right away. Then one of the units took longer than expected to rent out, and the business account I set up for my real estate investments began approaching a zero balance at an alarming pace.
The lesson: The amount of money your lender requires is by no means enough of a cushion, especially if the property will need work to get it rent-ready. Now I always plan on a repairs budget in addition to a six-month reserve for every investment property.
2. Don’t rush the mortgage process
The average mortgage takes about 50 days to close, according to the Ellie Mae August 2020 Origination Insight Report. And while many lenders will claim they can close in 30 days, typically a lot needs to go right to meet such an aggressive timeline.
With my first investment property, my lender said it needed at least 30 days to close, but longer would be better. Since I was eager to get started, I set the closing date for 30 days from the date of my initial offer. By the time the contract was actually signed, there was a 26-day window to close.
I ended up closing on time, but it came down to the last minute and could have easily been delayed if anything went wrong. Now I set a 45-day closing window when making offers — a far more reasonable timetable.
3. Don’t take a seller’s word for anything
Perhaps the biggest thing I wish I’d have kept in mind as a rookie real estate investor is this: Sellers and their agents don’t always have your best interests at heart. After all, a seller wants their property gone, and their listing agent wants that commission.
My first investment property (a triplex) was advertised as a “fully-leased cash machine in need of some minor TLC.”
I was able to see two units on my initial showing. Both were in reasonably good condition, and between the two, they probably needed about $1,000 in repairs. I wasn’t allowed to go into the third unit. I was told the tenant was a nurse who worked night shifts so nobody (including myself or a home inspector) could get in during the day.
The listing agent told me it was “basically the same” as the other two units and that I could come see it at night at some point. I lived an hour away and already had an inspection scheduled, so I took the listing agent at his word.
To put it mildly, that was a mistake. Not only did the mystery unit’s tenant pack their bags and leave the day I closed on the property, but after one look inside, I figured out why. In fact, I don’t know how anyone was able to live there at all. The carpet had the strongest cat urine odor I’ve ever smelled and made a squishing sound when I walked on it. All surfaces I could see (countertops, appliances, tubs, toilets) had layers of grime so thick I couldn’t tell their original color. And the unit was so infested with fleas I didn’t even see any of the other issues until I came back with a can of bug spray. In all, it cost me over $8,000 (and a month of unplanned vacancy) just to get that unit rentable.
The bottom line: When it comes to buying an investment property, take anything a seller or their agent tells you with a big grain of salt. Trust but verify. A few hours one night could have saved me thousands of dollars, and I learned a very expensive lesson.
As a new real estate investor, you’re bound to make some mistakes. But hopefully you can take these lessons I’ve learned, as well as lessons other experienced investors have learned the hard way, and avoid making some of them yourself.