#1 -Not researching your area market values properly
Getting to know what houses are selling for in your geographic area where you’ll be doing your property investing is crucial to success. Work with a Realtor, study your local Multiple Listing service listings daily, check local Pennysaver listings, and of course, make a habit of visiting properties regularly – even if you‘re not considering them for purchase. It‘s imperative that you get a strong feel for housing values in your area at any given time. That way, you’ll be able to easily spot properties that are below market value – and you’ll be much less apt to overpay for any house.
#2 – Skipping meeting with a mortgage banker, and not obtaining a pre-approval letter before searching for a property
Before you can actively look for investment opportunities, you must have a financial starting point that’s grounded in reality. And the mortgage professional you choose will ground you better than anyone else can. He’s in the business of making loans – not trying to make loans. So he will be brutally honest with you about what you can afford. And once you have those numbers, you’ll be able to obtain that all-important pre-approval letter to show to all prospective sellers – your entry pass for being taken seriously when making offers.
#3 – Not researching and exploring all the possible ways to leverage a property prior to purchase
Really, when you think about it, the number of ways you can finance your investment property are almost limitless. It just depends how creative you’re able to get… While a mortgage banker is the standard way of financing properties, you can also try asking sellers if they’ll offer you some form of owner financing. In addition, you can try and obtain a home equity line on your home to help finance investment property. Already own other rental property? You can take cash out by refinancing them, and re-investing your equity in them. Family members? Another great source of other people’s money (OPM)…Credit cards with short term promotional offer balance transfer? Why not – as long as you’re fully cognizant of the financial dangers involved when they convert to their regular interest rates. There are also “hard money” lenders that investors can use. Of course, as their name implies, their interest rates and points charged on their loans will be the most exorbitant way to finance a property. It’s up to you to determine the optimum, most cost-effective and affordable way to finance your next investment property.
#4 – Not setting a time horizon for the property before you buy it (including when you intend to sell, as well as a conservative estimate for the time it will take to sell it)
When you spot a property that makes sense to go after purchasing, you’ll want to also set up a time line of how long you intend to hold the asset. This will help crystalize your thinking of your time horizon for the property. You’ll need to determine if you intend to turn it over quickly, or hold it until you’ve fixed it up and then sell it, or if you intend to hold it as a rental for a medium time frame (one to five years), or a long time frame (five years and over). Once you’ve set your time horizon, you’ll be able to plan how best to finance and utilize your asset.
# 5 – Failing to crunch your numbers – and re-check them before making an offer
This would appear obvious. However, too many beginning investors fail to properly crunch and re-check all their numbers – and unfortunately end up overpaying for the property.
# 6 – Falling In Love With a Property
Always stay disinterested in any investment property you’re considering purchasing. It’s not going to be your home, so creating an emotional attachment to it will end up blinding you to how much you should be paying for the property, as well as any improvements you will be budgeting for the investment.
# 7 – Not using a home inspector prior to purchase
Unless you’re an expert at home construction, you must protect yourself by hiring a home inspector once you’ve gotten an accepted offer on your investment property. Not using one to save several hundred dollars is simply foolish – you need to know everything that’s wrong (or potentially wrong) with such an expensive investment. With this knowledge, you’ll best be able to financially plan on current and future repairs. And without it, you can’t…which could be inviting a financial disaster.
# 8 – Not setting a realistic budget for rehab work
As mentioned in previous articles on finding a contractor and their role in any rehab project, you’ve got to have agreed on some basic budget prior to purchasing an investment property that requires renovation. While it is common to go over-budget for unforeseen construction issues that usually may arise, that base starting budget is critical. Otherwise, you’ll be bleeding money faster than you can imagine.
#9 – Not setting a proper and defined time frame for rehab work
Like the importance of setting a realistic budget, setting a defined time frame for any renovation is also imperative. Otherwise, your project will drag on – and go way off your time horizon you originally set. Time is, indeed, money.
#10 – Undercapitalization (Overspending – going way over budget and not having enough back-up reserves)
Undercapitalization is one of the major issues for any business – especially start-ups. Relating to having crunched your numbers properly, you must make sure, and feel comfortable, that you have planned for (and created contingency plans) for properly capitalizing your property investment project. In creating any budget, make sure you have a line item for the expense of cost overruns (usually 10% of the renovation cost). What other funding sources can you plan on to stay afloat until you either sell the property, or make it cash positive (if it’s a rental property)? Always plan on that rainy day being tomorrow…
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