Investing in real estate might be a great way to build lasting wealth, but it has its share of pitfalls.
Property is one of the single most expensive purchases you can make, giving you a lot of liquid tied up in a single investment.
When you start investing in real estate, you are taking a risk, but there are ways to minimize the risks and avoid unplanned expenses.
You want to enjoy the profits of your real estate portfolio, not spend everyday stressed about cash flow. Here are some of the most common mistakes and some tips to avoid them.
1. Underpricing Repairs
A property that comes with an asking price that's too good to be true probably needs significant repairs.
If you can't see the issues, it means they could be hiding behind the walls, carrying a massive price tag.
Renovating a property to rent or sell is a great way to earn equity and add value, but only if your repairs come in on-budget. An unexpected issue costs more for the repair and leaves the property vacant for a longer period of time. Underestimating repairs costs is one of the biggest mistakes new real estate investors make.
Avoid breaking the bank on repairs by:
- Getting the property inspected by an expert. Let the inspector know you want every detail about needed repairs. Some inspectors may gloss over issues to help you line up financing, but that won't help when you are underwater on your mortgage.
- Don't skimp on your contractors. There are plenty of places where you can cut costs, but the contractor you choose should not be one of them. A good contractor will do the job right the first time.
- Research average costs of materials and repairs in your area. The more you know about the cost of repairs, the more you can negotiate the price with your contractor.
- Expect to overshoot the estimate and build a slush fund into your budget. Even with a good inspection, you might run into surprise repairs, so have the money on-hand to cover any last minute additions to the construction plan.
2. Buying the Wrong Location
Where you buy an investment property might be even more important than what you pay or the condition of the property.
A beautiful house in an area with a 30 percent vacancy rate could sit empty for several months each year.
A more expensive property in an area with virtually no vacancy will stay tenanted, keeping your cash flow stable.
Before you pick a property, zero in on an area.
For a new landlord, you'll probably want something that is close enough to commute to fairly regularly, and in an area that has appeal. Look for some of these signs, which indicate that you can find and keep tenants.
- Easy access to shopping and transportation.
- Low unemployment rates and big local employers means there should be a fairly stable source of potential renters.
- Find something near, but not next to, a popular luxury apartment building. If an apartment complex can keep full, you should have no trouble finding tenants.
- Check the crime rate and school statistics. These numbers can affect a tenant's willingness to live in a particular area.
- Track selling prices for a period of time. If sales are rapid and prices on the rise, it might be a prime time to invest. Another set of sales figures to watch for is a stable price after a drop. If prices have gone down and stabilized, the neighborhood could be ripe for another price increase. If all other signs point to revitalization, buy low, sell high definitely comes into play.
3. Failing to Check on Cash Flow
When you buy an investment property, you don't want to have to reach into your pocket to make mortgage payments.
From day one, you should strive for positive cash flow.
Avoid operating underwater with a little investigation.
- Look at properties near your prospective purchase. Even if total area vacancy rates are low, empty houses near your investment can make it more difficult to find tenants.
- Track population changes. As more people move into an area, the need for housing grows. If you can catch an area at the start of a population explosion, you can rake in solid returns.
- Check the property math before you put in an offer. Sometimes, a property that makes sense as home just doesn't work out as an investment. You'll want to total up all your expenses (taxes, mortgage, insurance, maintenance, etc.) and compare that number to average rental rates in the area. If the numbers don't work, walk away.
4. Missing Compliance and Regulatory Issues
Different areas have different laws surrounding landlords and tenants.
Before you buy, make sure you understand all of the regulations that could affect your investment.
For example, Maryland has strict requirements regarding lead paint.
- Know the safety regulations inside and out, and factor the expense of compliance into your cash flow plan.
- Find out about licensing and leasing. The rules are different in every area, and a legal lease in New York may not be enforceable in California.
- Adhere to livability standards. These change based on your area and may affect the number of tenants allowed to reside on the property and the amenities you must provide.
Making Real Estate Investments Profitable
Buying an investment property is exciting, but it can also be full of anxiety.
If you do your homework, stick to the numbers and obey all of the local ordinances and regulations, you could find a property that will enhance your monthly income.
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