Whether you’re looking to flip houses or collect rent from an apartment building, real estate can make a great addition to your investment portfolio. Remember though that potentially large gains come with some hefty risks. A solid investment strategy and careful planning won’t necessarily turn you into Warren Buffet or Donald Trump (thank goodness!), but it can significantly increase your wealth. Missteps, however, can land you in the poor house, which is a property you definitely want to avoid. To do so, make sure you don’t fall victim to one of these seven common but costly mistakes.
Choosing the Wrong Agent:
Perhaps the Realtor who helped you find your current home was amazing to work with. It makes sense to work with him again when you’re ready for an investment property, right? Wrong. Investment properties and family homes are two very different animals. An expert in one may know very little about the other, and this can cost you dearly when you buy a property or lead you to the wrong property altogether. Always choose an agent who has extensive experience in investment real estate like those at https://pumpedonproperty.com/buyers-agent-brisbane/.
Used car dealers often say they make their money when they buy a car, not when they sell it. If a car fetches $10,000, it’s much more profitable if the dealer only pays $3,000 for it rather than $7,000. They buy with the car’s value in mind, and you must do the same with investment properties. Pour over MLS listings, search property tax records and have the property professionally appraised before you jump in. Overestimating how much rent you’ll get from an apartment building or what you can flip a house for has serious implications. Get the help of pros and know the true value of your potential purchase.
Just as important as understanding a property’s true value is understanding it’s true cost. A property in need of a little TLC can often be had for less, but the repairs can easily exceed what you save. Even if the building you’re considering is in excellent shape, you’ll still have ongoing expenses.
You’ll need to clean and paint between tenants, for example, and keep up with the mowing and landscaping. You’ll have to make repairs for your tenants, which will sometimes exceed expectations – think weekend rates for an emergency plumbing issue. Roofs and appliances all need replacing from time to time, and you’ll need to carry insurance on your property and pay property taxes. You’ll also need to pay tax on your rental income or the profits you make flipping the house. Investors need to remember to take all these expenses into account, and they’re often more costly than new investors realize.
Forgetting the Importance of Location:
Real estate discussions often mention location ad nauseam, but it is that important. Getting the most bang for your investment buck requires buying in the best location you can comfortably afford. Residential tenants don’t want to live in a scary part of town or right next to busy railroad tracks. Commercial tenants need easily accessible, highly visible spaces. You can change a lot about a property to make it better and more desirable, but you simply can’t move it. Though taking a gamble on an up and coming area can pay off, avoid undesirable locations.
The mortgage on your investment property is something you’ll likely carry with you for many years. As such, it’s important to get it right. Securing financing is often challenging, especially for fresh investors with limited capital and no proven history of turning risk into reward. Since a plucky attitude won’t convince a bank to give you a loan, you’ll instead need a nice down payment and a good credit score to make things easier.
You need to rethink your investment readiness if you’re facing a loan with any of the following:
- A high interest rate
- An adjustable interest rate
- An uncomfortably high monthly payment
- A balloon payment
Even if you plan to flip a property rather than holding onto it, you must stand ready to keep it longer than anticipated in case you face unexpected delays.
Thinking in the Short-Term:
Just like investing in stock markets, property investing works best as a long-term strategy. In an appreciating market, it’s possible to start with a small property to get your foot in the door and then trade up. This involves keeping the property for a year or two and then selling it for a profit. You can then use that profit to buy a bigger property or one in a nicer location. This is a workable strategy, but the real money is in the long game.
The Your Investment Property website, for instance, tells the story of a property that sold for $11,000 in the 1970’s. Today, the property is worth over $2 million. That’s a stellar investment return, but it never materialized since the house has been bought and sold several times since 1970 rather than being held. Holding a property lets you benefit from its appreciation in the long-term while making rental income in the short-term. The goal is to buy multiple properties rather than trying to trade up.
Being Too Passive:
Taxing authorities and investment professionals refer to rental income as a passive investment activity because you’re not actively buying or selling. Instead, you rent out the property and let your tenants provide you with an ongoing income stream. Don’t let the name fool you, however. Novice investors sometimes take the word passive a bit too much to heart.
If you’re managing the property yourself, expect to spend considerable time scheduling maintenance tasks, screening tenants and making repairs. Even if you hire a property management firm to do the work for you, you must check in and make sure things are going the way you want them to. New investors are sometimes a little too passive and find their property has deteriorated and lost value under someone else’s watch.
One of the best ways to avoid all of these mistakes is to reach out and get help. Your accountant, financial planner, and the right real estate agent can all help you make sound investment decisions. If a property isn’t right, walk away rather than forcing the issue. There is always another opportunity around the corner, so hold out for the right one. You’ll be glad you did.