10 Common Mistakes When Buying Investment Property
Purchasing a good investment property can be fun and exciting, especially for new investors. However, there’s a lot that goes into buying investment property. Because you are making such a large investment it is important to take your time to ensure the property you do purchase is just right for you.
It’s not just about selecting the most beautiful house in the area. There’s more to it, and that’s why successful property investors take their time in selecting and reviewing properties. To help you make the right choice, I have compiled a list of typical mistakes real estate investors make.
Mistakes to Avoid when Buying Investment Property
1. Not looking at enough investment properties before buying
Look at the different investment properties available in your area of interest before making an offer. Successful investors don’t just rely on one source of information before buying investment property. Remember that real estate agents have a motive to sell you the property they want (they get a commission) and although they are an excellent source of information you may want to avoid taking financial advice from them. Just because they say this is a ‘great deal’ or ‘great investment’ doesn’t mean it is.
Always do your own research and analysis before buying. Look at multiple properties and do financial analysis on many properties before committing to buy. For more information I have previously written about planning to buy a property.
2. Not doing your due diligence
Before making an offer, you need to investigate the actual worth of the property that you are planning to purchase. A due diligence will help you find out what similar properties are worth, the amenities available in the property and neighbourhood, and if you can actually profit from it. Knowing the property’s market value will also help you negotiate a good purchase price.
It can also pay to get a building and pest inspection done on your property. It will cost you a few hundred dollars but could save you thousands in repairs that need doing.
3. Bidding too high at an auction or getting into a bidding war
A bidding war is certainly not a situation you want to be in. If you find a property that another buyer is heavily interested in, don’t get involved. When you get into a bidding war, you end up offering an unreasonably high price for the property, without really thinking if the property is worth it. So whatever you do, don’t bid more than what is reasonable for the property’s condition. Bidding forces you to make a decision- one that you might regret.
4. Getting “emotionally attached” to a property
As an investor, you need to see a property as an investment that will earn you money. Don’t purchase a property, or refuse to sell it, just because the place reminds you of your hometown, or because it has a charming garden. At the same time, you shouldn’t be purchasing in a particular town just because you have good memories in that place.
Be business-minded and always look at the big picture. Ask yourself, “Can I sell this property at a higher price?”, or “Will someone actually want to lease this place?” Remember, the goal of buying investment property is to make money, not to collect houses and incur huge debts. Always focus on capital growth and the demand for living spaces in that area before making a purchase.
Getting emotionally attached will cause you to pay too much and increases the chances of you buying a complete dud.
5. Failing to research the street and area
Doing your homework is an important part of buying investment property. Familiarize yourself with the neighborhood by speaking to locals and realtors. Doing this will help you find out which parts of the city people prefer to live, so you can then go and buy properties there. For starters, majority of people prefer to live in areas with:
• Quiet neighbourhood
• Commercial areas
• Convenient forms of transport
However, this is not the be all and end all. As long as you know that the property can rent and it makes financial sense to invest in the property then it may not need to have any of the above features.
Researching your area before buying a property is so important I wrote this post all about it.
6. Buying properties in an area with a depreciating market
You might think that you’re cutting a good deal by buying investment property in an area where prices are falling. Think again. When you invest in property, you expect that its value will appreciate in the following years, so making a purchase in a depreciating market is not always a good investment.
No amount of research or statistical data can accurately determine when the prices in that area will pick-up again. If there are less people in the area then there are less potential buyers and renters which generally means prices will drop. Always look at buying investment property where demand is growing faster than supply as this tends to push prices up
7. Not saving for a sizable deposit
Having a big deposit saved up will allow you to pick a suitable investment option, rather than being forced to purchase something simply because it is all you can afford.
Also having less than a 20% deposit (plus fees) will mean you are likely to have to pay lender’s mortgage insurance. This is a fee paid to the bank of lender to cover them in case you default on your loan. This is not refundable and is basically lost money. Having a larger deposit will often mean you don’t need to pay this.
8. Over extending yourself with your mortgage
When you set yourself a target price STICK TO IT. So often we get caught into the glitz and glamour of a more expensive property that is only “just a little bit more”. Before you know it you are buying a property that is way to expensive and you are struggling to afford the repayments.
Again, avoid getting emotionally attached and remember why you are investing. To improve your life, not to make it a living hell. Repayments that you can’t afford will make your life difficult and will make your financial situation more difficult (not easier). So be careful not to over extend yourself. Always be conservative.
9. Failing to buy positive cash flow property
As an investor, you need to strive to maintain a healthy cash flow position. Positive cash flow properties make you money, without any more contributions on your part. This often allows you to extend yourself into more properties and achieve a greater return on investment.
Selecting properties that can give you high rental income or renovating a negative cash flow property are just some of the things you can do to generate positive cash flow.
You can convert negative cash flow properties into positive cash flow properties. However, that would require substantial capital and a lot of patience because you’ll have to renovate the property, and pay for the mortgage and other expenses using your personal funds until the property is let. For newbie investors, it may be best to buy positive cash flow properties first, so they can quickly recover their capital and save up to buy more properties.
10. Not taking into account ALL expenses associated with the property
It’s a big mistake to think that the only thing you will be paying for is the house’s purchase price. There are many expenses associated with buying a property!
On top of the mortgage payments you will have to spend money for the deposit, taxes, closing costs, renovation, and maintenance, along with costs for marketing the property to tenants or buyers. You also have to pay your council rates, insurance and other fees along the way.
To avoid this mistake, try to have enough cash reserves that you can use for these expenses (if the rent doesn’t cover it). Better yet, calculate every possible expense before buying investment property, and have at least a 10% margin for unexpected expenses.
In reality, buying investment property can’t make you an overnight millionaire. If it were that easy, everybody would be doing it. However, many of these mistakes can be avoided if you take the time to educate yourself, create a plan, and do your research.
Sure, you will experience challenges along the way, but you’ll also learn, and make money in the process. Isn’t that why you wanted to begin investing in the first place?