Tips For Safer Investing
To augment my first list of top ten property investing mistakes, here are another ten traps to always be on the lookout to avoid:
1) Choosing a loan based on the interest rate only.
Interest is one of the least important criteria because it could vary over the life of the loan. Learn to select a loan with terms that are immediately crucial for you, and which give you the best cash flow from your property.
2) Not figuring in hidden costs.
Hidden costs are mostly related to closing costs on acquisition of investment property, such as mortgage tax, mortgage insurance and additional escrow for taxes a lender may require. In addition, if you’re purchasing an investment condominium or cooperative unit, be sure to calculate in hidden costs such as association or board dues, as well as any new association tax levies.
3) Purchasinging an investment property to obtain a tax loss.
The use of tax losses through negative gearing can help high income individuals offset the tax burden from other income. However, the ultimate aim should be to gain capital growth. Let a CPA or other tax professional guide you before you begin your search for a negative cash flow investment property.
4) Not claiming depreciation.
As mentioned above, consult your tax advisor regarding how best to depreciate your investment property. Different types of properties can call for different depreciation schedules that will benefit you most.
5) Inadequate property insurance.
Insurance premiums on investment property are tax deductible. Policies should be reviewed yearly to make sure you don’t underinsure your investment (especially if you’ve made significant repairs or renovatiuons to the building since you bought it).
6) Paying too much for the property.
Many times an investor may get too emotionally attached to a property, develop a “gotta have it” fixation, and then overpay for it. In addition, sometimes purchasers will act too quickly, feeling they need to “nail down” the deal in order to secure the property for themselves – especially if there’s a hint of competition for the building. When this happens, investors tend to waive house inspections, or not seek other opinions as to valuation prior to bidding on the property. Big mistake. Stay unemotional! Always do your homework, get to know the area you’re buying in, as well as what comparable sales of like properties have been going for in recent sales data.
7) Not researching the local rental market properly.
If you set your rents too high, you can lose out on potential tenants, and create a higher vacancy rate for yourself. On the other side of the equation, if you set your rents too low, you’ll be artificially limiting your overall cash flow and net income.
8) Being your own property manager.
Unless you’ve had some really good experience doing property management, consider utilizing the services of a pro, at least inmitially. Then, if you feel up to easing yourself into the role once you get to see how they do it, go ahead and try. Property managers earn every penny they cost, and the benefits will truly be seen in your increased cash flow.
9) Allowing bad tenants to become deadbeats.
If you allow a bad tenant to get behind in their rent, the whole stack of cards can cave in. It’s amazing how quickly one tenant in arrears can quickly become two or more who owe you. And it can be a very long and costly process to collect back rent. Especially if you have to end up hiring an attorney to start an eviction proceeding. Very long. Very, very costly. ‘Nuff said.
10) Skimping on simple property maintenance.
Never count on your tenants to bring up any problems the building is showing. And the reason is simple: they don’t want you around. So don’t count on them to call you
when there’s a mnor, constant drip from a water pipe. Or when cracks develop on the walkway leading to their unit. Or when their light starts to flicker, indicating a potential for a fire. Tenants call in emergencies – burst pipes, no heat, or an actual fire that just started. It’s up to you (or your property manager) to make regular, routine inspections of all units as well as the grounds. If not, you’re asking for all sorts of trouble – especially since you have legal liability to properly maintain the property. So don’t skimp on doing regular preventative maintenance. It will halp your cash flow in the long run.
photos courtesy of kristinandcory.com, davidcares.com, reliancecpa.com. karlymoore.wordpress.com, wilmothpropertyservices.com, propertymanagementinsider.com
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