Many people are diversifying away from stock market investments to more tangible portfolio assets. Real estate investments are certainly the most common tangible asset investors start with.
However, real estate is costly and thus high-risk if you don’t know what you are doing. Avoid these common investment property mistakes buyers make.
4 Common Investment Property Mistakes Buyers Make
“If you buy it they will come,” seems to be the mentality of many first-time real estate investors. They think that just by getting the title on a property, renters will flood in and thus the money will flow. This isn’t the case.
In fact, there are many costs first-time investors don’t anticipate that end up costing them because they didn’t factor those into potential rents. These include maintenance, advertising, and repairs. Unlike your own home where you might leave a repair for a while, landlords must fix things in a timely fashion.
Additionally, tenants don’t always remain in the home and often trash the place while living there. You need to factor vacancy time and property rehab in between tenants.
Poor Location Selection
It has been said over and over when it comes to real estate, “Location! Location! Location!” Real estate investments are no exception. Buying a property that is in a less than desirable location makes it difficult to both rent and resell.
Sure, great deals can be found in depressed markets and unsafe neighborhoods, but at what cost? You may have trouble making your money back after a rehab, let alone making a profit on the deal.
Rehabbing properties in high-risk neighborhoods can be profitable but you need to make sure you understand the risks. So make sure to research neighborhoods thoroughly that you are interested in investing in.
Renting to those in high-risk neighborhoods can mean more problems with upkeep and maintenance, including vandalism, drug and gang issues.
Not Understanding Financing
Buying a personal property and buying an investment property follow two very different financing principals. You won’t get the same great financing programs and rates available to owner-occupied homes. In fact, everything from insurance to property taxes will increase with investment properties.
Expect to have higher down payment requirements for investments and be prepared for higher interest rates. Conduct extensive market research to make sure your property will yield the rental income or sale proceeds to pay the higher costs and still have profit.
Failing to Perform Due Diligence
Just because you plan on rehabbing a property doesn’t mean you should ignore all the due diligence requirements of sound investing. This means pulling all title reports and having inspections and disclosures note anything that might be wrong with the property.
Finding out there is a huge lien on the property transferred to you upon the sale could lead to foreclosure. Similarly, not paying attention to a potential foundation issue can lead to thousands in repairs you weren’t budgeting for.
Buying a distressed property doesn’t always mean you’re buying a money pit; learn to assess properties to properly budget for repairs and prepare for unanticipated costs. There are always unanticipated costs when buying an investment property, even with sound due diligence.
Start small with your first investment. There is no need to learn the ropes with a million dollar apartment complex. Buy a single family home or a small multi-family building for your first few deals. This way, in case you make a mistake, it will be a bit easier to recover from.