Today I met with a friend of mine who shared his experiences over the last 4 years with his only rental property. He purchased a property with no money down (when that was still possible) with the intention of renting it and collecting positive cash flow over the next several years. Unfortunately, he’s had a string of bad luck with tenants as well as unforeseen repairs, vacancy and maintenance. While any savvy investor knows to budget for these types of expenses, there are just going to be those properties where you can throw those numbers out the window.
While it would be nice to try to point fingers at certain people or circumstances, sometimes a property just doesn’t pan out anywhere near the way you had planned for it to. As was the case with my friend, he’s been through 4 different tenants in 4 years with a fair amount of vacancy in between. As experienced investors will tell you, the more times you have to turn a house for a new tenant, the more expenses you rack up as a result of the mess the previous tenant left behind. Add to this a busted main water line, a roof leak, HVAC maintenance, vandalism, etc. it all starts to chip away at any return you may have hoped for (as well as your resolve to stay invested).
Welcome to real estate investing. No matter how many rosy books you read or seminars you attend, there are always going to be challenges in your investing career. Don’t get me wrong, I’m definitely not attempting to talk anybody out of real estate investing …. But I do think it’s important to educate folks on the risks associated with owning rental properties.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Spreading the Risk
The problem many folks run into when it comes to buying investment property is that the projections they had planned for on paper may not flesh out when there is only one property in the portfolio. Most investors have an expense factor that considers certain variables such as vacancy, maintenance, turnover, etc. Though, if you’re only 2 years into a single property, the chances of those projections being anywhere near reality are probably fairly slim. Why? Because, you simply don’t have a large enough data set to accurately predict those types of variables.
However, an investor that has owned 10 properties over the last 8 years probably has a much better chance of predicting and achieving the variable costs across his or her portfolio. When you own multiple properties, it’s much easier to absorb problem houses across the entire portfolio as there are going to be offsetting properties in the portfolio that perform at a much higher level than the others. When you measure the entire portfolio over several years, you begin to average out the vacancy, maintenance, and turnover variables. As you add new houses to the portfolio, it becomes much easier to achieve the yields you had planned on because it’s a lot less likely that one or two underperforming properties are going to drag down the overall performance.
Regardless, I know the frustration of starting out your investing career with an underperforming property. It’s difficult to want to buy more after feeling the pain of unmet expectations or even lost money. However, at the end of the day, investors that are making smart buying decisions have a much better chance of being successful when taking an approach that involves spreading the risk across multiple properties.
I’d be interested in hearing from some of you on this topic. How many investors started out with a difficult property but eventually acquired more properties that enabled your overall portfolio to perform as projected?