Don't Buy Rentals Until You Read This List!

Rental properties are powerful tools for building long-term wealth. However, if you aren't careful, they can become financial burdens that drain your cash and sanity. I have owned over 50 rental doors and assisted veterans and first responders in building successful portfolios. Today, I'll share the five biggest mistakes that kill cash flow—and how you can avoid them.

Understanding Cash Flow: The Foundation of Rental Success

Cash flow is the money left over after accounting for rental income and expenses. Positive cash flow means you're making money each month. Conversely, negative cash flow indicates that you're paying out of pocket to keep your property afloat. In today's market, with rising interest rates and property prices, many investors get burned by failing to do the math properly. They buy the wrong properties, borrow under unfavorable terms, or neglect to build systems that protect their investments.

To avoid this pitfall, let’s explore the five major cash flow killers and how to shield yourself from them.

Mistake 1: Forgetting to Include All Your Expenses

This is the most common mistake for first-time investors. Many look at rent, subtract the mortgage, taxes, and insurance, then consider what’s left as profit. However, this is only the tip of the iceberg.

You need to account for various other expenses that chip away at your returns:

• Months when your property is vacant, requiring funds to cover those gaps.

• Property management fees, which typically range from 8-10% of your rent.

• Regular upkeep like landscaping, minor repairs, and cleaning.

• Major repairs such as roofs, HVAC systems, and water heaters.

• Specific regulations for multifamily properties.

• Rental registration or inspection fees that many cities impose.

  
  

Let’s consider a real-world example. If a property rents for $2,200 a month and you deduct $1,500 for the mortgage, $400 for taxes, and $125 for insurance, you might think you have $175 left as cash flow. However, when you factor in $100 for vacancy, $210 for management, $150 for maintenance, $150 for capital expenses, and $25 for your rental license, your total expenses amount to $2,540. This means you're losing $340 each month or over $4,000 a year, despite the initial appearance of a good deal.

Don't fall into the trap of surface-level math. Run the full numbers and budget for hidden costs to avoid unpleasant surprises down the line.

Mistake 2: Buying Older Properties Just Because They’re Cheap

A $30,000 house may sound like a steal, but I’ve learned the hard way that older properties can become financial black holes. For instance, I bought a 1920s home with seller financing and rented it for $1,450 a month. Initially, it seemed like a cash-flowing deal. However, after four years, I incurred unexpected costly repairs totaling $13,000:

• A tree root damaged the sewer line.

• Lead-based paint required repainting.

• Moisture and rot developed in the crawl space.

• The hot water heater failed.

• The driveway cracked and needed repairs.

• Electrical work was necessary due to outdated wiring.

• Deferred maintenance added up.

  
  

After years of financial struggle, I finally raised rent and carried out maintenance—but it was a painful lesson. Older homes may fit popular investment rules but often come with hidden issues that can cost you significantly.

If you’re considering an older property, budget aggressively for potential expenses or purchase at a price that allows for proper renovations. Sometimes, demolishing the house and building anew might be the better option.

Mistake 3: Choosing the Wrong Financing Terms

Many investors underestimate how much financing terms can impact cash flow. The difference between a 15-year and a 30-year mortgage can make or break your deal. For a $250,000 loan at 6.5% interest:

• A 15-year mortgage costs about $2,178 per month.

• A 30-year mortgage costs roughly $1,580 per month.

  
  

This disparity of nearly $600 each month can significantly affect your financial breathing room. Although a shorter term saves interest over time, it can hinder cash flow.

I prefer a 30-year loan and make additional payments when I have the cash. Seller financing can be another game changer. Negotiating a 4.5% interest rate can lower your monthly payment further, positively impacting cash flow. Furthermore, considering private lenders who might provide interest-only payments or balloon payments can enhance your financing options.

Mistake 4: Not Putting Enough Money Down

This idea might be controversial, but a 20% down payment isn’t always sufficient. On a $300,000 property, a 20% down payment means $60,000 upfront and a mortgage of around $1,600 per month. However, doubling your down payment to $125,000 could reduce your monthly mortgage to about $1,160—creating a significant monthly difference that can protect you from financial strain.

If you lack that kind of cash, don’t lose hope. As Tony Robbins says, "You don’t lack resources, you just lack resourcefulness." Consider:

• Partnering with someone.

• Utilizing seller credits.

• Offering equity for capital.

• Looking for undervalued deals.

  
  

Don't force a 20% down payment on a property that can’t cash flow. Adjust your strategy, and focus on ensuring cash flow remains king.

Mistake 5: Poor Tenant Screening

This pitfall can catch you off guard, even with everything else in order. You may purchase the right property, secure favorable financing, and crunch the numbers, only to have your property manager place a problematic tenant.

A single bad tenant can annihilate an entire year of profits. In my business, I subject every applicant to a rigorous 10-point screening process:

• Income verification

• Employment verification

• Past rental history

• Credit score and credit report review

• Eviction record check

• Background screening

• References from previous landlords or employers

  
  

If an applicant doesn't meet our rigorous standards, they don’t get the property. Treat your rental business like a business—because it is one.

Final Thoughts: Running Rentals Like a Business

The five biggest cash flow killers are as follows:

1. Overlooking hidden expenses

2. Purchasing old properties without adequate budgeting for maintenance

3. Opting for short-term or high-interest financing

4. Under-capitalizing your down payment

5. Conducting poor tenant screening

   
   

Cash flow doesn’t occur by chance. It requires careful planning, precise structuring of deals, thorough vendor screening, and treating your properties as businesses. I’ve made these mistakes—and paid the price—but I also built systems to rectify them.

If you want your rental investments to generate income instead of becoming money pits, do the upfront work. Run accurate numbers, secure proper financing, and screen tenants thoroughly.

Remember, while rental properties can be powerful wealth-building tools, they must be managed wisely.

Tools to Help You Succeed

One exceptional tool is Flipper Force. This platform was created by real estate investors for real estate investors. It assists in:

• Analyzing deals efficiently

• Accurately estimating rehab costs

• Planning project schedules and tracking progress

• Monitoring expenses in real-time

• Organizing photos and documents in one location

  
  

Using Flipper Force improves efficiency, curtails financial surprises, and maintains smooth operations. If you're aiming to elevate your real estate investing game, it's worth exploring.

Stay Connected and Keep Learning

Real estate investing is a journey, and continuous education is vital. Whether beginning or expanding your portfolio, being aware of these common pitfalls can save you money and preserve your peace of mind.

For personalized assistance, consider scheduling a free strategy session with an experienced mentor who can tailor guidance to your unique situation. Always remember to treat your rentals as a business—this mindset sets you apart and fosters genuine wealth-building.

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