Buying real estate can be a great investment if done correctly. However, there are also many ways you can lose money in real estate if you don’t know what you’re doing.

Here are some of the most common ways people lose money with real estate investments:

How To Lose Money With REAL ESTATE?

Overpaying for Properties

One of the fastest ways to lose money in real estate is to simply pay too much for a property. With real estate investing, your profits are made when you buy since you make money through appreciation over time or monthly cash flow. Overpaying for a property eats into your potential profits.

Some common mistakes that cause people to overpay include:

Not properly evaluating comparables – Failing to look at recent sales of similar properties will make it hard to accurately gauge a property’s market value. Relying solely on the seller’s asking price is a mistake.
Ignoring needed repairs – Cosmetic issues can hide deeper problems. Inspect thoroughly and get repair estimates to avoid overpaying.
Getting emotionally attached – Falling in love with a house can cause you to overlook flaws and overpay. Stay objective.
WAIVING INSPECTIONS – Waiving contingencies like inspections in competitive markets to make an offer more attractive is extremely risky.

To avoid overpaying, thoroughly research recent comparable sales, get professional inspections, and make offers based on objective property criteria rather than emotions. Paying market value or less will set you up for success.

Not Accounting for ALL Expenses

Beyond just the purchase price, real estate investing involves many other expenses that must be accounted for. Failing to adequately budget for these costs is a huge mistake that can quickly lead to losing money.

Some major expenses that first-time investors often underestimate include:

Closing costs – This can total 3-6% of the purchase price for title fees, insurance, taxes, and more.
Repairs and maintenance – Especially with fixer-uppers, repair costs mount quickly. Budget at least 10% of value.
Property taxes and insurance – Vary by location but need to be properly estimated.
Property management fees – Usually 10% of monthly rent if using a property manager.
Vacancy costs – Plan for 1-2 months per year of lost rent from turnovers or unpaid rent.
Capital expenditures – Occasional big-ticket repairs like roof or HVAC replacement over the years.

Accurately projecting ALL the costs involved with a rental property before purchasing is key to understanding the true profit potential and avoiding losing money. Don’t cut corners here.

Choosing the Wrong Location

“Location, location, location” isn’t just a random real estate slogan – it’s crucial when it comes to long-term profits. Choosing the wrong location can doom you to losing money on a property.

Some things that can make a location “wrong” include:

Low-growth areas – Without appreciation, profits will be limited even with good cash flow.
High crime and blight – This limits tenant demand and increases vacancies.
Limited economic opportunities – A lack of jobs, entertainment, etc makes an area less desirable.
Bad schools – This “turns off” many families from renting in an area.
Nuisances – Nearby freeways, industrial areas, etc can deter tenants.
Isolation – Difficult access and lack of surrounding development hurt demand.

When evaluating locations, look for signs of growth and development, low crime, construction and infrastructure investment, and amenities that attract tenants like good schools, parks, and shopping. Taking the time to find the RIGHT location will help your investment succeed.

Not Screening Tenants Properly

The success of any rental property depends heavily on finding and keeping good tenants. One bad tenant can cost you thousands in damages and lost rent. While tempting to simply take whoever applies first, thorough tenant screening is crucial.

Some key parts of the tenant screening process include:

Credit & background checks – Look for red flags like prior evictions, bankruptcies, and collections.
Income verification – Tenants should make 3x the monthly rent. Require recent pay stubs.
Reference checks – Speak to previous landlords about their payment and care for the property.
Meet in person – Get a sense of their demeanor and attitude in how they treat you.
Clear screening criteria – Set standards for credit score, income, eviction history, etc and stick to them.

Avoid renting to friends or family or making exceptions to your criteria as this often ends badly. Yes, screening takes time but skipping it leads to problem tenants and major headaches for any landlord.

Not Drafting a Solid Lease Agreement

A good lease agreement is a legal document that clearly outlines the rights and responsibilities of both landlord and tenant. New landlords sometimes use generic or incomplete leases that leave them exposed legally.

Key elements that a thorough rental lease should include:

All party’s names and rental property addresses
Term length – Typical is 1 year
Rent amount and due date – Plus grace period and late fee terms
Deposit amount
Who pays which utilities
Use of property restrictions
Maintenance and repair responsibilities
Access rights for landlord to property
Tenant insurance requirements
Clear termination clause and reasons for eviction

Having an attorney review your lease template is highly recommended. This ensures you have the necessary provisions and follow state laws. A solid lease protects you and makes expectations clear to tenants, saving you headaches.

Not Budgeting for Vacancies

Even the best landlords will inevitably deal with vacancies in between tenants moving out and new tenants moving in. Not properly budgeting for these periods of lost rent is a common mistake.

A good rule of thumb is to set aside 1-2 months of rent per property each year for vacancies. This varies based on market conditions and how quickly units rent in your area.

Saving up an ongoing “vacancy fund” by putting aside a % of rent received is the smartest approach. This covers your mortgage, taxes, maintenance, and other costs during times when the property sits empty but expenses continue.

Don’t think vacancies won’t happen to you. Proactively plan for these inevitable voids, budgeting conservatively to protect your profits.

Ignoring Maintenance and Upkeep

Ongoing maintenance is crucial for any rental property – but it’s easy to let things slide. Lack of proper care and upkeep almost always comes back to bite landlords.

Here are some maintenance mistakes and tips for avoiding them:

Waiting until things break completely to fix them – Stay proactive with repairs before they worsen.
Using the cheapest handyman possible – Pay for quality work to avoid repeating repairs.
Not inspecting regularly – Walk through quarterly and look for issues needing addressing.
Neglecting the exterior and landscaping – Curb appeal matters for attracting good tenants.
Being reactive, not proactive – Have systems to catch issues early before they escalate.
Skimping on or delaying capital expenses – Eventually, big upgrades like roofs and HVAC systems will be needed.

Creating a maintenance schedule and budget and then sticking to it is essential. Ongoing care protects your property and investment over the long run.

Not Having Proper Insurance

Unexpected accidents and problems can hit any rental property. Not carrying the proper landlord insurance leaves your investment vulnerable, risking major financial losses.

Two key insurance policies every landlord should have:

Property insurance – Covers damage to the property itself from causes like fire, storms, flooding, vandalism, and pipe bursts. Make sure to get the right coverage amount to fully rebuild.

Liability insurance – Protects against lawsuits from tenants and guests for injuries that happen on the property due to negligence. Typically $100k minimum.

Additional policies to consider:

Loss of rents – Replaces lost income if the property is damaged.
Content/appliance coverage – For things like washers/dryers if not the tenant’s responsibility.

Shop policies from multiple providers and work with an agent experienced in landlord policies. Having the right coverage saves you from large out-of-pocket losses. Don’t risk it.

Trying to Manage Everything Yourself

Especially when first starting, many landlords want to handle everything themselves to save money and control the tenant experience. However, taking on too many hats often leads to frustration and burnout.

Know which tasks are best left to professionals:

Property managers – Worth the ~10% monthly fee to handle advertising, tenant screening, maintenance requests, rent collection, compliance issues, record keeping, and more day-to-day matters. Provides a helpful buffer between you and tenants.

Handymen – Unless you have lots of DIY experience, handle repairs and installation jobs through vetted pros rather than tackling yourself.

CPAs – Hire an accountant to ensure you maximize tax deductions and keep excellent records.

Lawyers – Consult real estate attorneys to review your lease, handle evictions properly, and provide guidance on legal issues.

Learning to let go of certain things makes being a landlord much smoother and avoids costly mistakes from taking on too much.

Not Setting Aside Funds for Emergencies

No matter how well-maintained a property is, unexpected repairs and surprises always pop up. Water heaters leak. HVAC units die. Roof spring leaks.

Not having an emergency fund set aside to handle surprise costs is asking for trouble. Experts recommend having at least 3-6 months of operating expenses available in cash reserves or access to credit.

This money can be used for costs like:

Major appliance replacement – Refrigerator, washer/dryer, etc
Paying the deductible for an insurance claim
Covering a long vacancy period
Affording an unexpected tax bill
Financing major repairs – New roof, plumbing overhaul, etc

Being prepared and having funds on hand to handle the surprises will prevent major headaches and keep your investment on solid ground. Don’t get caught off-guard.

Not Keeping the Big Picture in Mind

It’s easy to get overwhelmed dealing with the day-to-day grind of landlording. But you have to keep sight of the end goal – long-term returns over decades, not quick profits.

Making knee-jerk reactions or panicking over short-term hurdles can jeopardize your investment. Avoid decisions that hurt over the long run:

Selling too quickly without allowing time for appreciation
Taking out risky loans or cash-out refinances for short-term cash
Reducing maintenance and upkeep budget to save money
Dropping rent prices instead of being patient in finding good tenants
Compromising on tenant screening to fill vacancies faster

Nurture your property and investment through challenging periods without compromising your standards or long-term focus. The temporary issues usually correct themselves over time.

Not Knowing When to Walk Away

Sometimes properties have major underlying flaws or money pits that warrant walking away altogether. Sunk cost bias can cause investors to keep pouring money into a bad investment.

Signs it may be time to cut your losses:

Major foundation issues or water intrusion problems
Extremely outdated electrical or plumbing that needs a full overhaul
Neighborhood decline and increase in crime
Persistent pest or mold issues resurfacing repeatedly
History of tenant problems and abuse of property
Minimal appreciation potential due to market changes

Be ready to be honest with yourself. Sometimes it’s better to salvage some capital and reinvest it into a better property that will be more profitable.

Failing to Learn the Rules and Regulations

Landlording involves a variety of legal and regulatory issues that vary by state and municipality. Not educating yourself on your local laws is asking for trouble.

Some key areas to study up on:

Landlord-tenant laws
Security deposit and accounting rules
Allowable reasons for evictions
Proper notice periods
Rent increase limits
Inspection and entry notice requirements
Anti-discrimination laws
Property tax laws
Permitting and registration requirements

Attend landlord classes, seek out experienced mentors, and research the nuances of your area. This helps avoid lawsuits, fines, and other major missteps due to ignoring local regulations.

Conclusion

Real estate investing can lead to great wealth over time with the right property and strategy. But many rookie mistakes and miscalculations can quickly lead to losing money if you aren’t careful. Avoid the errors outlined above and educate yourself thoroughly before jumping in. Patience and planning will serve your investments well for the long haul.