Mistake #1: Tearing down and rebuilding
Tearing down and rebuilding single-family houses (one for one) in my market is cost prohibitive. Purchasing a house with the plan of tearing it down and building another in its place does work in some markets, but not mine yet. There are still enough building lots available and the cost of getting rid of the old house is very expensive. The dump fees have climbed enormously over the last few years. In addition to that, you must go through all of the asbestos and lead abatement processes before you can tear the house down. This adds a lot of costs to the building site you end up with. If the zoning changes so that you can rebuild more units, it may be a different situation entirely. I purchased an old house a couple of years ago in an area that was recently rezoned to encourage multifamily units. I tore down the house and built a 7-unit townhouse building on the site. In this case, it was worth the exercise of tearing down the house to go from one house to seven units.
Mistake #2: Adding another story
I will not add another story on to an existing house in my market again. Mere words cannot express how painfully true this statement is. I made a huge mistake awhile back that I am still paying for. I purchased a house that needed rehabilitation and at the time it seemed like a good idea to add another story to it. This would give the house an additional two bedrooms, one of them being a nice master bedroom with a bath. The plan was fine -- there was nothing wrong with the plan. It was the implementation of that plan along with the costs associated with it that caused me all the problems. I spent way too much money. I had the wrong contractor on the job. The job took way too long. I did not pay close enough attention to the project in the beginning. I could go on, but my stomach is starting to hurt. The end result was that I have a house that is over built for the neighborhood and I can't sell for what I have into it. It is currently rented out and has a negative cash flow. Someday I will be able to get rid of the house, but I will never get rid of the bad taste in my mouth.
Mistake #3: Dolling up and "ginger breading" your rental houses like you would your own house
Please do not misunderstand me. I hold my residents in the highest regard and in no way think that I am better than them. I know that without them I cannot do what I do. I also do the best that I can to provide them with clean, safe and efficient housing. On the other hand, I also know that my lifestyle differs from theirs in some major ways and a lot of these differences are the differences between owning and renting. Although I strive to have my residents take pride of ownership in their rental home, it is still not the same as being the one that pays the mortgage. The difference between being an owner and a renter is one that I have learned to respect. It helps remind me of the all-important fact that this is a business and must be run that way.
Mike Sanderson is the author of the new book "Flipped Out? - Want to Achieve Sustainable Real Estate Success?" Available now at www.SandersonInc.com He is the CEO of a family business that owns, manages and maintains over 100 revenue producing rental units--a majority being single-family residences that were purchased in disrepair. Mike has actively participated at all levels of the purchase, construction and remodeling of over 100 homes and 20+ multiple unit buildings. He has numerous years in the construction of roads, new homes and remodeling that give him the distinct advantage of having a vast amount experience.
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