5 Common Real Estate Investing Mistakes New REIs Should Watch For

What if your first two rental properties started losing a combined $1,700 a month? That’s exactly what happened to one aspiring real estate investor. They purchased two real estate investment properties in a so-called up-and-coming Texas neighborhood during the post-COVID housing boom. Now, they’re overleveraged and struggling to cover roughly $4,000 in monthly payments.

This story is a classic example of how real estate investing mistakes can turn an exciting opportunity into a financial challenge.

In this article, we analyzed discussions from hundreds of real estate investors—from beginners with a single rental property to experienced investors managing large $3M+ portfolios—to identify some of the most costly real estate investing mistakes that could derail new investors.

The good news is that many of these common investor mistakes could be avoided once you know what to look for. You’ll learn:

How to accurately calculate real operating expenses (not just loan payments)
Why the "passive income" myth could lead to financial trouble
How to potentially avoid the overleveraging trap that hurts cash flow
The hidden costs that could catch many new investors off guard

Let’s get started.

Trap 1: Underestimating operating expenses

Many new real estate investors may fall into the trap of surface-level calculations. Some approach property investing with too much optimism, because they don’t fully understand the numbers.

It’s easy to assume profit means rent minus the loan payment and taxes, but that overlooks key costs—like repairs, maintenance, vacancies, and management fees.

These overlooked expenses could lead to monthly losses on investment properties that seemed profitable at first glance.

Try the 50% rule as your starting point

When evaluating investment properties, it’s hard to know your exact costs upfront.

That’s where the 50% rule could help. This guideline suggests that roughly 50% of your rental income may go toward operating expenses (excluding the loan payment).

For example, if a property could generate $3,000 in rent each month, you might estimate around $1,500 going toward expenses like property taxes, insurance, maintenance, vacancy losses, and utilities.

This rule might help you avoid overt optimism and determine if a property could actually cash flow before you commit.

The complete expense checklist

Here are the costs to account for as a REI:

Monthly loan payment(s)
Property taxes and insurance (rates could increase so don't underestimate these).
Vacancy costs (consider budgeting 5-10% of annual rent for vacancies).
Repairs and maintenance.
Capital expenditures (roof, HVAC—the expensive stuff).
Property management fees (8-12% of rent). Even if you self-manage, you should consider accounting for PM fees. You could also factor in compensation for your time and effort.
HOA fees (where applicable).
Utilities (depends on the lease agreement).
Pest control.
Landscaping (lawn care, tree trimming, snow removal).

Your action plan

While you could use the 50% Rule as a baseline, you should consider tracking expenses for 12 months to determine your property's true costs.

To stay prepared for unexpected events, you could build an emergency fund with at least six months of operating expenses.
For capital expenditures (CapEx), you could save between 1-5% of the property's value annually.

Trap 2: Falling for the “passive income” myth

Many people dream of passive income from real estate—buy a property, and the money rolls in effortlessly. But the reality is more complicated. Owning a rental investment property often involves ongoing maintenance and management issues that require time and energy.

This isn’t meant to discourage you, but to set realistic expectations. Being a landlord is at least a part-time job with unpredictable hours. You may find yourself handling everything from late-night maintenance calls to marketing, tenant screening, rent collection, and bookkeeping.

If you plan to self-manage your property, be prepared to dedicate roughly 4 hours per month per property for daily tasks and potentially an additional 48 hours each year for leasing and tenant turnover. In total, that's around 96 hours annually for one investment property—assuming no major problems arise.

The solution

Approach property ownership thoughtfully—consider budgeting around 5-10 hours per month for each investment unit if you plan to self-manage.
If you prefer a more hands-off approach, hiring a property manager or management company could be worth considering. Standard rates are typically 8-12% of monthly rent (around 10% on average), with additional fees for leasing (typically 70-100% of one month's rent) and lease renewals ($250-$500).
Your first property might serve as an opportunity to establish systems for the future. While managing one property on your own might be manageable, taking on three or four without proper systems could become overwhelming. Taking small, deliberate steps may be one of the smartest real estate tips for beginners interested in scaling up.

Trap 3: Overleveraging

Debt could help increase returns for a real estate investor (REI) during strong markets, but it might also heighten losses when challenges arise. Taking on too much debt without sufficient cash reserves could lead to trouble—one unexpected repair or a few months of vacancy could create financial strain.

For beginner REIs, being prepared for unexpected expenses may be more important than simply securing financing. This is one reason why lenders often require landlords and REIs to maintain adequate reserves.

How overleveraging can happen

Low down payments: Acquiring more properties with minimal down payments (typically 3.5% to 10%) can seem appealing. But this leaves almost no equity buffer. If property values drop just 10-15%, the investment property could go underwater quickly, meaning the loan balance exceeds the property's market value.
Cash-out refinancing: Extracting 80-90% of your equity for the next deal may have been a popular strategy pre-2020. Today, it could be a risky move that leads to higher interest payments and increased risk of default. Cashing out at 80-90% might also mean you have no safety net if things go sideways.
Adjustable-rate mortgages (ARMs) or short-term debt for long-term holds: When interest rates rise, these financing options could drastically reduce or eliminate cash flow and may even lead to default risks.

How to avoid this trap (essential real estate investing tips)

You should consider entering each deal with a significant equity cushion (20-35% for rental properties) and a strong personal financial position. While 43% is a good debt-to-income ratio (DTI) in traditional lending, as a real estate investor, you may want to maintain a DTI at or below 40%.
It's easy to make optimistic rationalizations like "it's a great area" or "it will appreciate," but generally, you probably should avoid investing in a cash flow negative property hoping it will one day turn positive. The property ought to pay for itself and then pay you, starting from day one.
Consider building reserves that cover at least 6-12 months of debt payments across your portfolio.
Try to protect your rental properties and long-term holdings from interest rate volatility by opting for fixed-rate, long-term financing like DSCR loans.

Trap 4: Skipping due diligence

"Hot deal." That simple phrase has unfortunately led many REIs astray. The appealing photos and attractive price might hide foundation cracks, aluminum wiring, or inflated rent projections. Due diligence is not just a checkbox activity. It could protect you from impulsive decisions as a REI.

Get a professional inspection

The real cost of a property includes its price, plus the cost of fixing any unseen and potentially expensive problems.

A thorough inspection that covers structural analysis (foundation, framing, load-bearing walls), HVAC systems, plumbing and electrical, roof and exterior damage, and pest and mold detection could be highly beneficial. Once you have a complete picture, you can try to renegotiate based on the true cost or walk away from a potential money pit.

Common issues that could lead to thousands in unplanned expenses include:

Foundation issues: These can range from minor cracks (~$500 fixes) to extensive repairs (~$10,000 or more).
Aluminum wiring: Often found in properties built between 1965 and 1973. This type of wiring poses fire hazards and may make your investment property uninsurable. Rewiring costs average around $16,000.
Dated electrical panels: Older electrical panels have been linked to fire hazards. The average cost to replace a panel could be around $2,400.
Polybutylene pipes (1978-1994) and galvanized pipes: These are often prone to corrosion and leaks. Replacing them could cost between $1,500 and $15,000.

Verify the neighborhood and market

Consider assessing the neighborhood in person. Drive around at different times—mornings and evenings—to get a feel for the area beyond online information. Online research could include crime rates, school district ratings, and future development plans, which may influence rental demand and price appreciation.

You could also verify rental numbers instead of trusting seller projections. Try checking resources like Zillow Rental Manager or Rentometer, and consider speaking with local property managers to confirm what a property may realistically rent for in the current market.

Create your due diligence checklist

Your first property could help you build systems that may be useful as you grow. One system to consider developing is a due diligence process or checklist.

This checklist could include tasks like property inspections, title searches, rental market analysis, neighborhood research, and financial analysis. Many common mistakes in real estate investing may be avoided by following a consistent checklist.

By using the same checklist for every property, you might reduce the risk of making quick decisions based on emotions or personal preference.

Trap 5: Neglecting landlord laws and regulations

Most aspiring landlords are terrified of difficult tenants but the real danger could arise from not knowing the rules. Being a landlord is a highly regulated business. Simple oversights like changing the locks without proper notice or ignoring repair requests could lead to costly lawsuits.

The Fair Housing Act

Fair housing laws prohibit discrimination based on race, color, religion, sex, national origin, familial status, and disability.

The penalties for violations could be costly. A first offense could result in fines of up to $25,597, while a second violation may cost around $63,991. For a third violation within seven years, fines could reach $127,983 depending on where your investment property is located.

Other common regulatory pitfalls

Beyond federal fair housing law, most landlord-tenant laws vary by state and sometimes local jurisdiction.

Security deposit laws vary by state. For example, some states, like Ohio, require deposits to be held in interest-bearing accounts and returned to the tenant within 30 days of moving out.
Evictions are highly regulated in most states. Trying to take shortcuts with an eviction could easily make you liable. You should know the notice periods and specific procedures for evictions in your state. A single procedural mistake could result in a dismissed case or even fines.
Almost all states require landlords to disclose issues ranging from lead paint (for pre-1978 properties) to mold, bedbug history, and flood zones. Specific disclosure requirements may vary by state.
The implied warranty of habitability applies in almost all states. This means you, as the landlord, have an ongoing legal obligation to ensure functional plumbing, heating, electrical systems, and structural integrity. In short, you have a duty to provide a safe, livable home. Landlords who fail in this duty could risk costly tenant lawsuits.
Local rent control or stabilization laws might limit how much and how frequently you can increase rent. Additionally, HOA rental restrictions could prohibit or cap rentals entirely.

Protect your business

Consider investing in landlord training courses specific to your state.
It may be helpful to consult with a real estate attorney before purchasing your first rental property to create compliant lease agreements and essential documents.
Joining a local real estate investment association (REIA) could help you stay informed about new laws and compliance strategies.
Aim to document everything in writing—tenant communications, repair requests, property condition, and notices served.

Conclusion

Now that you understand the 5 most costly real estate investing mistakes that could derail new REIs, from the potential passive income fantasy to ignoring landlord-tenant laws, you know what to look out for.

You don't need to be afraid of these common real estate investor mistakes or of real estate investing as a whole. You might just need to approach REI with more diligence: proper education, realistic expectations, and conservative financial analysis.

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Frequently Asked Questions (FAQs)

What is the "50% rule"?

The 50% rule is a guideline suggesting that approximately 50% of your rental income could go toward operating expenses (this excludes the loan payment). It helps investors estimate upfront costs and determine if a property may cash flow, avoiding excessive optimism.

How does real estate leverage work?

Real estate leverage lets investors use borrowed funds, such as hard money loans, to buy investment properties and expand their portfolios without paying the full cost upfront. This approach may help maximize returns while distributing investment capital.

To learn more about how leverage works, check out this blog: How to Use Leverage to Grow Your Real Estate Portfolio.

Why is an LLC good for real estate investing?

Establishing an LLC for real estate investing can offer three key advantages:

Liability Protection: This structure could help separate your personal assets from business debts or potential lawsuits.
Tax Flexibility: You may choose how the LLC is taxed (e.g., as a sole proprietorship, partnership, S-corp, or C-corp) to best align with your financial approach.
Credibility: Operating as an LLC could make you appear more professional to lenders and tenants.

What are the five most common real estate investing mistakes?

The five common mistakes real estate investors make are: 1) Underestimating operating expenses, 2) Falling for the "passive income" myth, 3) Overleveraging, 4) Skipping due diligence, and 5) Neglecting landlord laws and regulations.

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