Welcome back! Today, we're going to be talking about the three mistakes I see would-be investors make the most. Now, look, investing in real estate can be a great thing. We talk about it all the time as something super positive. However, investing in real estate and not doing your research, um, that's a fool's errand. Okay, so definitely watch out for these three things if you're thinking of investing in real estate. If you're watching a channel where they say none of this matters, just know you're probably paying for a course and being scammed.
Number One: Not Knowing the Rents
One: Not knowing the rents. Okay, so sometimes I'll have someone say to me, "Hey, look, I really want to buy a two-unit property in XYZ." Okay, cool. How much are those units going to rent for? "Well, I don't know." Okay, so how do you know if it's gonna cash flow? If you're buying an investment property, the goal is to make it so that the tenants are paying the whole mortgage, and you're getting some money. That's what we call cash flow. So, in order to make sure a property is going to cash flow, you need to know either A) what it's currently renting for or B) what it could rent for.
Now, here's something that a lot of people miss: if you need to use projected rental income in order to qualify, the lender is going to use the lower of current rents or what market rents are. And what we see a lot of is people saying, "Oh, I can rent the units out for two thousand dollars a piece." And I'll go, "Okay, cool, but what are the current leases?" And they'll say, "Oh, the current lease is $800, but I'm gonna kick them out and refurbish it, then it's $2,000." Guess what, guys? I have to go off that $800. I've got to go off that current lease, and I'm only going to use 75% of that income. So, it's really important that you guys know when you're talking to a lender. You want to make sure you're asking, like, "Hey, are you using projected rents to qualify me?"
Number two, if they are, you need to know how much in rent the property is going to have to get in order to hit a specific price point. With our investors, we're reusing rental income to qualify. We're looking at numbers on every single property that they're looking at writing on. Because if the rents are too low, they won't qualify. So, you really want to be transparent with your lender. There's no such thing as, "If I'm using rental income to qualify, and you're like, 'She gave me approval for $500, so I can buy whatever I want at $500.'" Absolutely not. It's gonna have to be $500, and the rents are going to have to be at least XYZ if I'm using rental income to qualify. This is the same for all lenders.
Now, look, if you qualify for the property without rental income, that makes it easier for sure, because then we don't have to pay attention to what the current rents are, what's the potential market rent. We're not delving into that from my point of view. However, from your point of view as an investor, you need to be making sure that the property is getting cash flow. Because a lot of times, what I'll hear is, "Oh yeah, my friend bought like four houses; he's making so much money." And then they're like, "I'm gonna buy a house too; it's gonna be rad." But like, where are those houses? How much is the rent? What's the condition of the house? Are there current tenants that you can't get rid of? That's something we see a lot of too. Sometimes, people will be like, "Gosh, I don't know why this seller's selling this property." It's because they have horrible tenants that haven't paid them for years that they're trying to get rid of. So, really, really important if you're looking at buying an investment property, pay attention to cash flow. Pay attention to potential for cash flow. Pay attention to what could stop cash flow. Who are the current tenants? What are their current leases? Have they paid? A lot of times, people go, "Oh, well, they've got tenants, so they're making money." There's a lot of people that don't pay their rent more than you would think. Okay, so make sure you're calculating: What's going to be the cost to clean? The cost if someone hurts this property? Do I have the ability to repair the property? So that's number one: cash flow. Paying attention to rents.
Number Two: Not Knowing the Restrictions
Number two is not knowing anything about the county restrictions. That's right. So, there are so many channels, so many Facebook groups. Everyone wants you to buy a house and turn it into an Airbnb. You know, there's all these TikTok guys saying, "Oh, I'm making a million dollars a month with my Airbnbs." Great, cool. If you guys want to go that path, it's awesome. You can make money as an owner of an Airbnb, right? However, you've got to know the county and town restrictions, guys. Because there's a lot of parts in America where Airbnbs are flat-out banned. Flat-out banned. And you may go, "Well, won't the realtor tell me?" Not necessarily. No, I mean, it's not their job to make sure that you understand all the investment ramifications of something you're considering doing. It's their job to sell you a house. Now, if you ask a real estate agent, "Hey, is it legal in this county to do an Airbnb?" A good real estate agent is going to know. It's that simple, especially if it's a tourist-type area. The good agents know every single rule about what can and can't be an Airbnb. If they go, "Yeah, sure, okay," that's a red flag. You should check with the county.
There's certain parts of the country where you need a business license. There's certain parts where there's no way in hell. There are some parts of the country where it's been legal, but then they've really restricted it and made it difficult for those Airbnb owners who are now struggling. So, knowing the county restrictions as well as the path the county is going on is important. I would be looking for any type of meetings. Has there been any discussion about the county clamping down on Airbnbs? Are there any concerns? Really pay attention to that because you don't want to end up in a pickle where you bought something thinking it could be a short-term rental because the realtor said sure, and you can't. Because that's a very different cost analysis. We all know that short-term rentals you can usually get more money than a long-term rental, right? If it's a desirable area and it's managed correctly. You know that brings up another thing: make sure you're looking at what it's going to cost to manage this property. If you're local to it and you plan to clean it after every single person and you have something in place, great. But if you're buying out of state, you know, I looked at this years ago. I had a 1031 that I needed to do, and I was looking at Orlando because my family, of course, we love Disney, who doesn't? And I was like, "Oh, this will be great. I'll do an Airbnb here." It didn't pencil out, guys. You know, I was looking at what the management fees were for a good manager. It was like 17% for them to deal with cleaning up and making sure the property was maintained and everything else. So, once I paid that mortgage, once I paid that 17%, once I took into account that it wasn't going to be booked every single day of the year, once I took into account HOAs because in this case, they were, once I took into account the fact that, you know, homeowners insurance was likely to go up, there's no profit.
And I'm not saying everything's unprofitable. There can be ways, but you have to be looking at the numbers, okay? For my situation, being someone who is not local, not going to be doing it myself, and relying on a third-party company that was going to strip my profits. So, make sure you guys are really paying attention to that. That's where I see the biggest mistakes is people are just assuming everything can be an Airbnb. And there's lots of parts of America where they are absolutely banned, absolutely banned, or they're on the path to being banned, or you need a business license and a whole host of things. Number three:
Number Three: Is It Legal to Rent?
Number three: Is it even legal to rent? Yes. So, we hit this one quite a bit. So, what we'll see is, we'll see like someone converted a garage into a living unit, but it's not actually legally a living unit, and they're renting it out. And you're like, "Okay, cool. So, I'm gonna live in the main house, I'm gonna rent out the garage. You can use rental income from the garage, right?"
No, no. We can only count rental income, you know. So, let's say you're like, "Well, wait. I just want to buy it as a two-unit investment, so I want to use the rental income from the house and the rental income from the garage." No, unless it's a legally permitted living unit, we cannot use the rental income, period.
Also, you're going to want to talk to a homeowners insurance agent because there is some level of liability if you're renting out places that are not zoned to be lived in. You know, sometimes you'll hit that with garden units in Chicago. We see a lot of that with garden basement units. Ohanas in Hawaii, right? There can be restrictions on those. You know, there's a lot of different properties where either the owner didn't do the correct paperwork or they're just trying to turn something like, sometimes we'll see someone turn half of the house, like the bottom floor, into another unit.
Guys, we're not going to use rental income from that unless it is a legally zoned second unit or ADU. We're not going to use rental income from it. And before you hop into it, if you're like, "Well, Jen, I don't need the rental income," cool, call an insurance agent. You know, call an insurance agent and say, "Hey, look, this is what I'm thinking of doing. You know, is this something you would insure as a rental property, right? You know, is there anything I should be aware of?" Because sometimes they just won't do it because they're like, "You're exposing yourself to too much liability." You know, you could be in a county where if the county finds out that you're renting a unit that's not legally zoned as a living unit, that they're going to fine you. And you could be in a position where the renter doesn't even have to pay you rent because it's not even a legally zoned unit. So, there's a lot of mud that you can get into with that. So, make sure that you're definitely paying attention to, "Okay, this says it's a two-unit property. I'm going to make sure it's zoned so that I can actually rent out both of these units legally and with no questions."
I just wanted to do a quick video for you guys. I think investing in real estate is great. I think I've seen a lot of people make a lot of money doing it. But just make sure that you keep your eyes open to these three things. Make sure that you're watching out for scams. There are a lot of scams out there. They do these seminars where they're always telling you these ways to, you know, "Oh, this is how we're going to do it." Guys, here's the thing: it's just like investing in the stock market or anything else. Tried and true, conservative, steady, real, the stuff that's like quick, fast, easy money generally really isn't. It's just easy for someone to get money from you for a course or a seminar when they're promising you that everything's easy, fast, and quick. Okay, the investors I know that are the most successful, they will out-research everyone. The amount of data that they have before they invest a nickel is vast. They don't just invest with their gut. So, definitely be aware. Any questions, of course, reach out. I'm licensed in 48 states to do mortgages. I am happy to help you guys get your first investment property or even your first home that you then turn into an investment property. And then we do it again, then again, then again. You know, so lots of opportunities. Love house hacking, so feel free to reach out.