The five bad habits of highly ineffective real estate investors

This from my Arizona Republic real estate column (permanent link):

I’m working with a lot of investors right now, which is fun for me. There are a great many challenged houses in the Valley, and it’s the investors, for the most part, who are digging in and restoring value to those homes.

There is another class of investors I don’t work with at all, and I’d like to highlight some of their bad habits, in the hope of convincing you to adopt better practices.

The number one bad habit of unsuccessful real estate investors is buying homes where there are no tenants. Yes, the houses are cheap in Buckeye, but that’s because there are no jobs in Buckeye. In ten years, the Valley’s western outpost will be a thriving rental community. Not now.

The number two bad habit? Buying way too much house. This 1,400 square foot house is selling for $75 a square foot. But we can get this 2,600 square foot house for only $30 a square foot! Even though the price seems very low, the house is too big for tenants, and too costly to maintain and keep cool.

Bad habit number three is buying the worst property available. No one wants to be treated like a second-class citizen. Bad homes send premium tenants to better homes.

The number four bad habit is over-charging for rent. If the market rent for a turn-key unit is $1,000, a bad landlord will offer his home dirty and unpainted — and then charge $1,100 a month. If he delivered the best-quality home at $950 a month, he would have the pick of the premium tenants. Instead, he’ll end up settling for the tenants no one else wants.

And that leads us to the fifth and most costly bad habit: Our investor chose the worst available model of a too-big house in a town without a tenant pool. The house is dirty and grungy, and he’s charging too much for it. Therefore, he will have no choice but to rent to tenants with bad credit, bad work records and bad real estate references.

Making money in the metropolitan Phoenix residential rental market is easier than it’s been in years. But losing money is easy, too, if you make the right mistakes.

2 comments

2 Comments so far

  1. Shane Pollock April 19th, 2009 3:36 pm

    Good post. Are you seeing a lot of new investors getting into the rental business in your area? I am starting to see a small increase in the number of first time investors in the Raleigh area. A lot of people think because prices are low any home is a good candidate for a rental. Unfortunately most are not looking at the numbers or the location before submitting the offer.

  2. […] you want right now, you’ll be able to get something better for less money a month from now. You don’t need to — and shouldn’t — but the cheapest rental property out the…, but there is no need to overpay for anything right […]

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