From the outside looking in, real-estate investing seems like a double-sided win. You’re holding a cash-flowing asset that’s also appreciating. Who wouldn’t want that?
But it is not so passive, and it’s not always cash-flowing, either. A recent survey by Clever Real Estate, an educational and agent-matching platform, found that 90% of 764 American respondents reported losing money on residential real estate, and a whopping 42% of them lost more than $200,000.
Whitney Dutton, a residential sales director for Native Realty in South Florida, says the popularity of house-flipping reality TV shows has glamorized the idea of investing. The reality is that it’s not for everybody: many unforeseen events can’t be controlled once you’re a property owner, and if you have little experience, you won’t be prepared for them, he said.
Daniel Cabrera, the founder of Sell My House Fast, told Business Insider he owned more than a dozen rental properties before unloading them in 2017.
“I had a full-time job at the time, and I even had a property manager managing the properties,” Cabrera said. “But still, every other day, the property manager was calling me. There was something wrong with this house, and then something wrong with the next house that needed to be addressed. And it got to a point where I was putting 20, 25 hours a week into something that I thought would be passive income.”
Cabrera isn’t alone: about 29% of the respondents said they regret buying an investment property because they have to deal with too much maintenance, cleaning, and upkeep.
Below is a table from Clever’s survey listing the full spectrum of investors’ biggest regrets.
Clever Real Estate
Dealing with bad tenants is top of the list. One big reason for landing in that situation is often failing to thoroughly screen people, which is also listed as a big regret.
Cabrera, who now buys, flips, and sells homes for a living in San Antonio, offers cash to buyers who want to move on quickly. He estimates that about a third of the properties he purchases are rentals gone wrong. “They rented it out and didn’t do due diligence on the tenant,’ he said. “The tenant messed up the house, and now they don’t want to deal with the problem, and they’re willing to sell it — and sell it at a discount — just to be able to rid themselves of the problem.”
Sometimes, even doing due diligence won’t guarantee a good outcome. Shelby Johnson, a US Army veteran-turned real-estate investor, says you can still end up with a bad tenant even if they look great on paper.
Johnson recently filed an eviction notice on one of her units after the tenant failed to pay. The property management company that oversees her unit checked the credit score and income requirements beforehand, but at some point, the tenant stopped paying rent and no longer allowed inspections. It took about 30 days to get the unit vacated, but by the time Johnson got her unit back, there was $7,000 worth of damages, she said.
“A lot of people think that they’ll buy a couple rental properties and just live off the cashflow,” Johnson said. “They have this really fairytale imagination painted in their minds about what being an investor is, but the reality of investing is that one bad tenant, one bad deal can cost you thousands of dollars, which is sometimes a couple years worth of profit.”
She said a general rule of thumb is to aim for $200 a door in monthly cash flow, which equates to $2,400 a year. In this instance, it would take almost three years without any other issues like late payments, vacancies, or repairs to recoup what she lost from that incident.
Evicting tenants isn’t rare for Johnson. She holds 45 rental units in North Carolina and has had to evict six tenants in the last 12 months. At one point, she owned 74 rental units but has since offloaded her least profitable ones.
Dutton, who has dealt with sellers wanting out, says even property owners trying to offload the problem can lose money in the process. If the tenant is not on board with a sale, they may not allow showings or refuse to cooperate with inspections. This can delay a sale, cause a deal to fall through, and even lead to a big decrease in the value of the property, he noted.
Johnson recommends buying multifamily properties with two or more units rather than a more expensive single-family home. This way, if one unit loses money for whatever reason, the other units will continue to cash flow. She also recommends having $5,000 of cash set aside for emergency situations.
The survey found that overpaying for a property is another regret. Cabrera noted that this often happens when potential buyers look at comps from a better time in the market, like nine months to a year earlier when values were higher. Buyers sometimes don’t realize that a few months could mean the difference between a buyer’s or seller’s market. Buyers should also be aware of whether they are shopping during a housing bubble, when prices are at their peak.
In terms of considerations when thinking about the location of an investment property, Dutton noted that one of the biggest expenses buyers often miss, especially in places like South Florida, is property taxes. There, home values have shot up by 30% to 50% in a short period, and annual property taxes for investment properties change based on those increases. The rules could vary by state and county. In South Florida, investment properties have a percentage-based tax on the value, but that value is reassessed annually and can increase by as much as 10% yearly.
“In Florida, we saw the biggest jump in sales prices nationwide,” Dutton said. “So when people came and bought a property for X and they think, ‘oh great, now my property is worth double,’ well, that is great if you pull your money out. But if you don’t pull your money out, your expenses increase as well. And when rents don’t catch up to that, now you’re left with a deficit.”
Another tax mistake buyers make is checking the current property tax and assuming they will pay the same amount. But depending on the laws in an area, the tax amount will reflect the purchase price, Dutton noted.
Underestimating the cost of property insurance is another blunder Dutton says he has seen people make. And this expense can be a big deal depending on location too. For example, Florida has a lot of cases of property damage from water and hurricanes. These issues have led many insurers to leave the market altogether. The insurance companies that are still willing to provide insurance have doubled and even tripled their prices, he noted.
Local laws are another location consideration. Some states have more landlord-friendly laws, while others have strong tenant protection laws.
In Johnson’s case, evicting her tenant took about 30 days. But for Chrissy Grigoropoulus, who purchased a six-bedroom home in New York’s Nassau County, an eviction process could be costly and take more than a year. When she took possession of her new property, there were occupants who refused to leave. Due to New York’s strict tenant laws, Grigoropoulus, a personal injury attorney, said she had to resort to a non-legal solution and negotiated directly with the occupant.
“In New York in general, especially in the five boroughs, it’s very difficult when it comes to landlord versus tenant-based litigation,” Grigoropoulus said. “A lot of times, the tenants have more rights than the landlords would hope that they would have, whether they’re paying or non-paying.”