Be careful out there…
Let’s face it, it’s easy to screw up when property investing. There are more than a few ways to lose your shirt if you’re not experienced at the game But here are several crucial mistakes any novice real estate investor needs to avoid like the plague. Once you’ve had a few years under your belt, then maybe…and I emphasize “maybe,” you will want to delve into these very risky options. But always keep your eyes wide open to these potentially dangerous investment areas.
One of the higher-risk moves a property investor can make is to purchase land with the prospect of developing it at some point in the future. It is extremely hard to predict long-term fluctuations in real estate valuations, what market forces will do to the value of the land, as well as your very limited experience n actually taking a parcel of property and developing it into a residential or commercial building or set of buildings.
I know an experienced local property investor who paid a steep price for a former amusement park parcel that offered a great location, but had been abandoned for many years. He felt it would throw off handsome rewards in the guise of a new casino for the area. Problem was, the state legislature, while allowing for a referendum on new casino sites, did not approve this investor’s site. The referendum made it to the ballot, several other sites were approved, and voters agreed this was a good idea. New casinos? Yes. Just not where the property investor for this particular property wanted them. The moral of the story – unless you’re wealthy enough to afford mistakes on big investment property (excuse the pun here) gambles, stay away. It’s simply too risky for the novice investor.
Steer clear of “gotta have it” real estate
You know this type of property – the expensive beachfront villa or condo, vacation rental or swank downtown “in” location with the exorbitant price tag to match. If you run the basic math on these types of properties, the amount you can get in rental won’t come close to the monthly carrying costs on the purchase and holding costs. And your negative cash flow will keep accumulating for every year you hold the property. Now, this may work just fine if you have other income you want to have offset with losses to limit overall tax liability. But if you don’t happen to be in the 1%, this would be a foolhardy route to take. Keep your real estate investments in reasonably-priced buildings in not-so-prized locations. No need to pay for something you don’t need – and that can hurt you – just for the “pride” factor.
Non-rental income properties
If you’re considering purchasing an “investment” for fun, forget it. This is a business. Second home? Fun. Land to build your dream home when you retire? Fun. Any time you tie up your cash (and more importantly, your credit) for non-rental properties, you’re shooting yourself in the foot when it comes to your future investment purchases. Treat property investing as a business. Treat fun as fun.
Overseas property investments
I’ve been an advocate in a number of articles here for foreign investing in real estate. However, they remain an investment vehicle for the experienced property investor, and not the novice. There remains a good deal of risk depending on the country you want to purchase your investment property in. Certain Northern European countries are hot right now. While others, mostly in Southern Europe, are still experiencing devastating economic problems. Fluctuations in currency, monetary policy and most especially, varying property laws, make overseas investing risky – and should be practiced by only the most experienced property investors.
Somewhat in the same related category as “fun” above, you should avoid time shares like the plague when it comes to evaluating them as real business propositions for rental income generation. This is because they make for lousy vehicles for investing. You can’t reasonably project what income streams will occur on them. Likewise, you also can’t predict the market fluctuations and valuations down the road for them as well. Hence – they make for a very unstable vehicle for real estate investment. Oh – and they’re extremely difficult to sell when it comes time to unload them.
Pay heed to the risks
So if you’re new to the property investing game, it’s best to avoid these risky endeavors listed above. Foreign investing, land deals, and negative cash-flow investing should be left to those best able to weather the pitfalls, as well as the greater risks inherent in these forms of real estate investing. Of course, as mentioned before, any “fun” property buying should be considered just that – fun. Not business.
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