When your real estate cash flow is managed well, your investments thrive and you gain opportunities for leveraging your current assets toward future investments. However, when cash flow is rocky, stress, worry, and instability become your constant companions.

There are simple mistakes that real estate investors make that lead to poor cash flow. Let’s take a look at five of these mistakes and what you can do to avoid them.

1. Jumping In Without Running the Numbers

You wouldn’t want to start running a marathon a kilometre behind other competitors, but some property investors unknowingly set themselves up for this kind of proposition by failing to run the numbers before they make a purchase.

Here’s a common mistake: you see a property for sale that appears to have all the features you want. It’s in a good location, has the amenities you’ve been looking for, and is even competitively priced compared with other properties in the area. Fearing the loss of the property to other, faster buyers, many investors make an offer without thoroughly running the numbers.

In the long run, it doesn’t matter how great the location is or how attractive the amenities are if you’re not able to cash flow the property, and the only way to know if it will cash flow is to do the calculations. Add up the mortgage, taxes, insurance, and maintenance reserve costs (plus any other expenses associated with a particular property) and see how the expenses stack up against realistic rents. Then have the courage to walk away from properties that don’t cash flow on paper. This is key in an effective property investing strategy.

2. Overpaying for Renovations

Many properties require renovations before they’re ready to rent, and these renovations should be included in your pre-purchase calculations. Remember, though, that renovations for real estate investments are different than renovations for personal residences.

Resist the urge to turn your rental property into a dream home. Keep your renovations practical and simple because elaborate renovations will be costly in two ways: they’ll eat up your cash flow and they’ll keep your property vacant longer than necessary.

3. Underestimating Maintenance Costs

This may be the most common mistake property investors make when it comes to cash flow. Many property expenditures are constant and predictable. For example, your mortgage will cost the same amount month after month, and local taxes don’t fluctuate very often.

However, electrical repairs for a malfunctioning hot water heater can cost anywhere from a couple hundred dollars to thousands of dollars depending on the extent of the problem, and if you don’t have reserves to cover the expense, your cash flow could be negatively impacted for months.

You can protect your cash flow from surprises like this by taking several precautions. Before you purchase a property, inspect it thoroughly so you know which systems and components of the property are the most susceptible to problems. This will help you know how much to budget for repairs. Next, it’s important to establish a reserve for maintenance. Set aside a portion of your profits each month for your maintenance reserve. Allow it to build until it’s large enough to handle the unexpected (but inevitable) surprises that property owners face.

4. Choosing an Undesirable Location

Nothing chronically sabotages property cash flow like a poor location. With an undesirable location, you’ll have a hard time competing with other properties, even if you keep the property well-maintained.

As you shop for an investment property, note its location relative to public transportation, shopping, parks, and local employers. Try to avoid properties on loud, busy roads or that have difficult parking situations. A great way to evaluate location is to ask yourself if you’d be willing to live in a given location. If not, move on.

5. Moving Forward Without Expert Advice

Just as it’s helpful to have a colleague read through your presentation to check for typos or logical fallacies, it’s also helpful to talk to an outside expert when it comes to your real estate investments.

Run your numbers by a financial expert who can point out any errors in your plan or offer advice about what kinds of real estate are working well for investors in your area. Ask questions when they arise, and get the kinds of answers that will help you to move forward with confidence. For more information about investing in property, or to schedule a time to meet with one of our real estate experts, contact us at Full Financial Services. We look forward to talking with you and helping you reach your goals.