The Ugly Truth About Real Estate Investing

In this article, I’ll be going over common problems you may face as a real estate owner/investor.

Real estate is a great way to build wealth. I have been a real estate investor for the past 5 years and have used it to grow my net worth at high rates of return and receive monthly cash flow from my tenants.

It is easy to imagine that this path to riches is paved with gold.

However, the reality is that the road to wealth is mostly paved with hard work and problems that require your tenacity and ingenuity to overcome.

Investing in real estate is not a “get rich quick scheme”.

It can take years to build up enough equity and cash flow to enjoy the fruits of your labour.

During that time you will work hard to locate, buy, and manage your properties. As you can expect, problems will arise.

Several things can go wrong when investing in real estate.

While building and managing my portfolio of rental houses,

I have seen many:

-Major repairs

-Tenant problems

-Vacancies

and negative cash flow are some of the most common issues that need to be addressed.

If you aren’t committed, it is easy to give up when the going gets tough. However, by investing for the long term and seeing things through, I have achieved my goal of financial security and made good progress towards financial freedom.

How you handle problems can make or break your efforts to build wealth for you and your family.

Major Repairs

Roofs need to be replaced, foundations shift, AC units break — if you own real estate for any length of time, you will experience major repairs that will require your energy and your cash to fix.

My properties have needed new hot water heaters, new AC units, plumbing repairs, new carpet, new paint, new doors, and much more during the time that I have owned them.

There are several things you can do to avoid and/or prepare for these major expenses:

ALWAYS inspect the property before you buy

a good inspector will identify issues during the due diligence period that will allow you to make an informed decision; they may uncover an issue with the foundation or find some hidden water damage/mold.

You can use this information to negotiate a price reduction to help pay for the repairs, or to just walk away from the property entirely if the damage will cost too much to repair.

Don’t try to avoid maintenance

It’s normal when managing property to try to reduce your costs as much as possible, but you will find over time that you can save yourself some money in the long run by paying for preventative maintenance.

Have a reserve fund

When you own property, you own a business.

it is important that you have a reserve fund to help cover any unforeseen repairs, otherwise you can find yourself in a cash loss that can force you to make bad financial decisions

Tenant Problems

People are almost always both the solution and the problem.

Your tenants are your customers, and your business exists to serve them. It is important to treat them as such and keep that in mind.

The vast majority of tenants will be good customers that pay their rent and take care of your property.

However, some tenants don’t keep up their end of the rental agreement, leaving you with headaches and unexpected costs.

I’ve had tenants that pay rent late, tenants that move out during an active lease and stop paying, and tenants that do more damage than the security deposit can cover.

Here are some ways to avoid tenant issues and handle them once they arise:

Good screening process

The best solution to any problem is to avoid it in the first place.

Having a solid screening process for potential tenants will help you find good ones that will pay their bills and take care of your property for you.

Look to do a background check, credit check, employment verification, and call their previous landlords to ensure they are good tenants.

Good rental agreement

It is important to have a solid rental agreement in place that is both fair to the tenant but also protects your interests as landlord.

the laws vary from different countries and states, so you will have to research what is appropriate for where you operate

Not paying rent

Sometimes tenants will struggle to pay rent, and as landlord you need to be fair and consistent in how you handle missed rent payments.

You should set a late rent policy that follows country law and follow it in every case.

don’t make different verbal agreements with different tenants, as this can open you up to lawsuit.

charge a late fee to encourage tenants to pay on time, and move to evict if they don’t pay by the required date.

Eviction during Covid-19 has changed, and helping tenants not become homeless is a strong consideration, but just remember to treat all tenants equally and fairly

Tenant damage

One of the biggest problems I have had as a landlord is a tenant moving out and leaving me with more repair costs than is covered by their security deposit.

I’ve had to replace new carpets that smelled like piss!! 🤢🤮

repaint house that was painted the year before, and other unsuspected expenses.

use what you can from the security deposit (always check country law) and request the tenant to pay the rest.

if they don’t comply, then you can turn your claim over to a collection agency that will help get your money for a significant cut of the proceeds

Vacancies

An empty house is a liability, not an asset. It isn’t making you any money, yet you still have to make your payments to the bank.

This is the risk you take as a landlord, and it is your job to ensure that your units stay as full as possible to improve your results.

Here are some thoughts on managing vacancies:

Keep your tenants

This should go without saying, but many forget it;

It is cheaper to keep your current tenants than to change them out and have an empty property, so keep them happy, fix things when they break, and be fair with rent escalation (more than 3% per year may cause them to move elsewhere)

make it a win-win for both parties

Marketing

This shouldn’t be a surprise, but getting a new tenant is mostly a marketing job.

You need to advertise your rental well with nice pictures and a good description.

You need to ensure leasing agents have ready access to the property so they can show it at any time on short notice.

Turnaround time

There is always work to be done after a tenant moves out, even if they took good care of your property; things wear out and need to be replaced, walls get dirty, etc....

Make sure you are proactive to go through the unit as soon as the tenants move out to get it ready to rent out in as short a time as possible.

You don’t want to market a unit that isn’t ready to be lived in as that will turn off agents and tenants, so get it ready fast

Price

Pay careful attention to the rent you are asking for your house.

It’s easy to ask for high rents hoping that someone will move in, but understand this will slow the process down and cause your property to be vacant longer.

It is usually better to ask for a reasonable rent that is slightly below other similar properties.

you can burn up much of your annual cash flow on a house if it sits empty for one month, so better to cut rent by £/€/$100 and move it fast.

Negative Cash Flow

I have become a firm believer that every rental must make positive cash flow to be considered successful, even if only £100 extra per month.

If you lost your job or main source of income today, would the rental help you or hurt you?

To improve your cash flow, think through the following:

Run the numbers BEFORE you buy

If you are buying an investment property, it is critical that you understand the numbers before buying.

Be conservative in your estimates to ensure that you have some wiggle room in case rent comes in a bit lower or expenses come in a bit higher.

Avoid buying properties where positive cash flow is not certain — this is difficult to do, but it is critical to your success.

Use a larger down payment

This will reduce your overall returns, but if you absolutely can’t find a property that makes positive cash flow where you want to invest, you can consider making a larger down payment, which will reduce your debt service costs and improve your cash flow.

You don’t want to be stuck with a surprise job loss and a house that needs you to pump money into it every month (also called an alligator because it will eat you alive 😂)

In my opinion, debt is only only if it is 100% paid for by someone else, so leave negative cash flow properties to the speculators that are willing to lose it all

sell if needed

In the end, if you end up with a property that you just can’t make work, look at selling it and using the proceeds to buy a better one.

My Closing Thoughts

Even though real estate is a great way to build wealth, there are numerous problems to overcome.

It is important to understand and be prepared for these issues in advance so that you can better manage them when they arise.

If you are mentally and financially ready to handle major repairs, tenant issues, vacancies, and potential negative cash flow that may come up, then you have already won half the battle.

Having the tenacity to work through problems is one of the most important traits of any investor, especially in real estate and is critical to building wealth.

If you own any rental properties, let me know what problems you have seen in real estate investing and how you have overcame them.

Till next time.