Many real estate investors are lucky enough to own rental property to be able to draw on the rental income to apply to mortgage costs. However, many investors make mistakes when buying rental property, and quickly find themselves in debt because of it. Here are seven blunders that real estate investors make when in debt that are important to know.

1. Not identifying potential problems.

It is easy to overlook the problems that can add to the expense of owning a rental property. This type of property is generally not the most stable, and poor cash flow can quickly put an investor’s ship into water. It is essential to know the potential problems that can result from owning rental real estate, and to be able to notice them before the investor does.

2. Purchasing at the market’s peak.

A prime example of this is paying too much for a rental property. In a hot real estate market, this is relatively easy to do as rental rates are increasing every year. However, when the rental market slows down, this can put an investor in major financial trouble. An investor must always make sure that a rental property is not over-priced, and that any potential deal is a reasonable price compared to similar, comparable properties.

3. Not building a positive relationship with their property manager.

A property manager may be a more impartial third party in a real estate deal than you and I as investors. Its job is to get a property ready for rental, collect rent, and issue repair requests. Therefore, a property manager needs to be a good fit for the investor who is buying the rental property.

4. Not properly protecting themselves.

Before a rental property can be purchased, a general rule of thumb is that the investor should insure the property for at least $1,000,000 in replacement value. Obviously, this will not cover the cost of any potential damage that may occur. When buying a rental property, it is essential that the investor uses an appropriate insurance policy to cover damages beyond the actual cost of the real estate.

5. Interest-only loans.

When an investor gets a loan that requires the borrower to make an interest-only payment for a fixed period of time, problems can quickly arise. The lender will require that this “teness of coverage” period is closed by selling the property. If a property does not generate enough rental income during this period, the lender will require that an investor make up the short fall, in the form of higher rental rates on the property. In other words, many times, investors must have 58% financing, or higher, to be able to make up for any short-falls.

6. Owning rental property does not require extensive property management knowledge.

While owning rental property can make the investor feel otherwise, the bottom line is that investors must get their hands dirty and learn to effectively manage a rental property. Only a professional who has extensive knowledge and resources when it comes to rental property will be capable of handling this kind of job proficiently.

7. Paying too much in taxes.

All commercial property owners pay taxes. However, there are some key differences when it comes to rental property taxes, based on the type of rental property. When buying a (tear-free) primary residence, an investor will be called upon to pay primarily tax just to purchase the property. However, if the property is located in a (tax) deficient area, this can lead to unanticipated difficulties. For example, if the area in which the property is located is rife with crimes, it may make the acquisition expensive, and could force the owner to either pay more in taxes or live a less valued life.

In conclusion, there is no simple formula to whether a rental property will be successful or not. Investors need to find the property that makes the most sense financially, in terms of both expenses and returns. Their focus should be on location, work requirements, and local market conditions. If these are carefully evaluated, there is no reason to have negative cash flow or see any return to investment until well after 2 years from acquisition completion, when leasing rates spike.