Staying out of trouble
In an effort to keep any beginning property investor cognizant of the lurking dangers inherent in any investment plan, here are several key issues to recognize. When you’re aware of the potential pitfalls, property investing can become a much safer haven for your investment dollars. Once you have a long term strategy for property investing, you reduce your overall risk substantially. In creating your own strategy, consider each of these particular dangers to avoid…
Make sure fees don’t eat your profits completely
Whether you’re acquiring or selling an investment property, there are many fees associated with the process that will invariably dig into your profit margin. Consider that when buying, you’ll be paying for a mortgage tax, recording fees, attorney fees (yours and your lender’s) and other associated closing costs. Also, don’t forget the property engineering report done by a licensed property inspector, and any tests that need to be performed as part of their inspection of the property in question. Of course, you’ll need to include the overall deposit amount you’ll be putting down on the property, over and above your actual mortgage.
Getting emotionally attached to an investment property
This problem is a biggie. As a property investor, you must leave your emotions at the door. Actually, leave them before you even round the corner to the property. Unlike your home, you can’t afford to get emotionally attached to a piece of investment property. Why not? Well, for one, you won’t possibly be able to negotiate for the property to obtain the lowest price possible. You are guaranteed to overpay. Talk to others you are close with (friends and/or family) as a check on yourself. If they say you’re not talking about falling in love with a property, you can at least believe them. And vice-versa. Let them tell you you’re not in love with a potential income –producing property.
Don’t rely on capital appreciation
If you’re going to count on any possible investment property to go up in value while you hold it, stay away from investing in real estate. While it would be nice to think it might appreciate – don’t bet on it. Instead, concern yourself with the cash flow first and foremost – that amount that your pro forma income statement is showing the property will throw off in profit each year for you. Then throw in the tax advantages of holding the property These are the two main determinants of acquisition viability (along with the capitalization or CAP rate, written about in a prior article here). If the property will create a positive cash flow that’s worth your investment dollars, then any capital appreciation due to market valuation increases should be considered gravy. Just don’t rely on the appreciation factor.
Be realistic about days on market when selling
Most property investors feel their property will sell quickly. Stop thinking this way. Instead, research the average length of time on the market in your area for like properties. Check with your local real estate agent (the one you should be working with exclusively for the best results). You never want to place yourself in a desperate, “gotta sell” environment, where you take a very low offer because you’re simply fed up with how long it’s taking to sell your investment property. And you’re basically fed up, and you take a loss in the process.
Always calculate your maintenance costs
Many beginner property investors make the mistake of forgetting, or underestimating their maintenance costs on a potential piece of investment property Make sure you allocate enough funds in your pro forma cash flow to adequately cover your anticipated maintenance and repair costs. One axiom: the older the building the higher the overall maintenance costs will be. An energy-inefficient building that has not ben updated in many years, and is in need of rehabbing, s obviously going to cost a great deal in annual maintenance costs than a new building. To be safe, figure on at least five percent of your annual rent roll for maintenance costs on any older building.
Make sure you’ve got adequate insurance
Tenant accidents happen all the time in the property investment world. Fires happen. Flooding happens. Just be prepared, so you don’t get caught with a huge financial hit should a disaster arise. Your insurance agent will guide you as to the proper amount to adequately cover each of your buildings in emergencies, as well as how much personal liability insurance you should obtain. Make sure you’re also comfortable with the deductible you choose – that is, don’t scrimp on too high a deductible to keep your policy amount down. Being aware of all these potential pitfalls when beginning as a property investor will help keep you out of financial trouble. And keep you running with a positive cash flow.
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