The single biggest mistake first-time real estate investors make is not running the numbers properly. They see a property listed for 130,000 that rents for 1,200 a month and think that sounds great without factoring in everything that eats into that rent check.
Here is what actually comes out of that 1,200 dollars every month:
Mortgage payment including principal, interest, taxes, and insurance. On a 130,000 dollar property with 25 percent down at 7 percent interest, you are looking at roughly 750 to 800 a month depending on your tax and insurance rates.
Vacancy. No property stays rented 100 percent of the time. Budget 8 to 10 percent for vacancy. That is 96 to 120 dollars a month you set aside even when the property is occupied.
Maintenance and repairs. Budget 10 percent of gross rent. Older properties need more. That is another 120 a month.
Capital expenditures. The roof, the HVAC system, the water heater, the appliances. These are big ticket items that you need to save for. Another 5 to 8 percent.
Property management. If you hire one, expect 8 to 10 percent of collected rent. If you manage it yourself, your time still has value.
When you add all of that up, your 1,200 in monthly rent might leave you with 50 to 150 dollars in actual cash flow. That is reality. If the numbers still work at that level, it is probably a solid deal. If you need the optimistic version of every number to make it work, walk away.
The investors who succeed long term are the ones who buy based on real numbers and treat the upside as a bonus. The ones who fail are the ones who buy based on best case scenarios and then panic when reality shows up.