When you have a considerable amount of spare cash (or even a little), looking to invest it is the smart thing to do. There are many who look at the sheer value of assets like property and think that’s the direction to go. Often, it can be. However, houses and apartments don’t make money themselves. Those who expect them to often find themselves dealing with a drain on their finances as opposed to potential profit. That’s because they’re making many of the mistakes we’re going into now.
Not doing your homework
There are, generally speaking, two options for how you make a return on your property investment. There’s buying a home to sell it again, usually after a renovation, then there’s renting it out to tenants. There are a lot of hybrid options like rent-to-buy properties and the like, but these are two very different processes most of the time. They both require different sets of expertize. If you’re a new landlord, then you need to look at resources like the Apartments Owners Association. Get learning about the legal side of keeping tenants, how to vet them properly, the risks, and how to increase revenue. If you’re buying and selling properties, then it’s mostly about learning how to read the market and increase the value of any asset you buy. Don’t jump into either practice before you’ve done your homework in advance. Otherwise, you’ll be making mistakes and rushing due diligence that could end up costing you.
Getting a bad deal
Of course, how much potential you have to profit off a house or apartment depends on how much you pay for it in the beginning. The property market flips between advantages to the buyers and the sellers. Be willing to look outside your area if there are only a few properties for sale and a lot of buyers. Find the market where the reverse is true and there you’re likely to get a property for a lower price. There are two primary elements that go into making sure you get a good price on your next investment. Your mortgage is the first. Work on your credit and consider saving up a greater down payment so that you can go on with fewer operating costs. The offer is the second part. Here is where research is going to be your best friend. Instead of operating solely off the offers that the seller is looking for, get a home inspection as recommended by Money Saving Expert, and look at the records for past sales in the area. Most sellers start by asking for bids at a price that’s much greater than a home’s true worth. Finding out the details mentioned above is the tool you can use to get closer to the real current value of the home.
Fit the property to the plan, not vice-versa
Not putting the cart before the horse might seem like an obvious way to put it, but the truth is that many would-be property investors start by buying a property before they then go on to decide what to do with it. The urge to have that asset in your hands quicker rather than later is tempting. But it can result in serious delays that cost you money in the long-run. Come up with your investment goals in advance. That way, if you decide to rent it, then you start the ball rolling with property management and fixing it up to living standards as soon as possible. Make the decision whether you want long-term regular income or immediate yields. Then fit them into a wider investment plan. Where will the money go once you’ve made it?
Treating your primary residence as an investment tool
Knowing when to call property an investment can be tricky. There’s no doubt that your primary residence is a valuable residence in its own right and can open up a lot of financial options. But what are those options really? You can get some extra revenue by renting out space you’re not using. You can re-mortgage the home to get investment capital or to manage debt. You can improve its value to resell it and move into a better home. But the truth is that primary residences don’t offer the kind of yields that truly serve as an investment. Follow the old rules of running any revenue plan: keep the business and the personal separate when possible.
Expanding when you’re not ready
There’s a lot that goes into running an investment property, whether it’s for sale or for rent. The goal for most investors is to keep a momentum going, to move from one property to the next. But that doesn’t mean you should rush it. For instance, if you’re renting out properties, then before you start renting out more, you should consider what systems you can put in place. These include such as online rent payment and tenant management software. This makes it much easier to deal with the added responsibility. For those looking to sell, then buying a home before you’re able to start renovating and flipping it means you can have many more months of paying for a property that’s not making you money. As HGTV states, you should only buy your next property when you’re ready. Either you have to make space to deal with the extra responsibility or put systems in place that take said responsibility off your hands.
Going it alone
A lot of people getting into real estate like to be hands on. They like to know their tenants personally, craft their own contracts, do their own renovations, and such. That’s fine if you want to do it that way. However, treating a small number of properties like that will result in you developing more of a full-time job than an investment route. If you want to keep that momentum going, then know the friends you’re going to need in advance. If you’re renting out a variety of properties, companies like Vision Property Management have the systems in place to make it much easier. Beyond them, you need to consider the regular help you need from property attorneys, real estate agents, home inspectors, and so on. Taking on too many responsibilities yourself won’t only burn you out. In the legally complicated world of buying, selling, and renting homes, it can get you in real trouble.
Not making friends with handymen
They might not be as integral to running the gauntlet of investments as the services above, but finding handymen you can trust is going to save you a lot of money in the long-run. Many landlords and home sellers realize they need to spend money on renovating and fixing problems in the properties they deal with. However, they don’t realize how frequent these costs pop up, especially as the portfolio starts to grow. Instead of approaching renovators, electricians, plumbers, etc. like a fresh customer, think about creating a long-term relationship with them right off the bat. This is about understanding the Business 2 Business model. If you can guarantee income in the long-term, such as making an exclusive contract with a certain renovator, then you’re likely to get a much lower price-per-renovation. Most businesses want to ensure that they’re making partnerships that guarantee them much greater gain in the long-term, even if it means sacrificing immediate profits.
Failing to prepare for cash flow bumps
Not having handymen at the ready when a problem happens in one of the rental properties you manage is going to create a cash flow bump, because it might stop you from filling a vacancy. The tips above help you smooth out that bump, but it brings out the fact that you have to anticipate them. For instance, you have to plan for losses during unexpected vacancies, which you can do with guides from places like The Balance. The best way to plan for these bumps is to realize what your cash flow looks like on any good day. Look at how much your property yields you, then compare it to how much past problems like vacancies, renovations, and additional services cost you. If you’re operating on a razor thin margin of profit, then any road bump could turn your profits into losses. Whether it’s by cutting losses or increasing revenue, you have to get out of that situation.
Sticking solely to one or two (or even three) properties
If you can only invest in one thing at a time, property isn’t the best way to go. That’s the simple truth of it. Rather, using a mutual fund that takes your money and puts it in a pre-made portfolio of investments is smarter. Why? Diversity in investment. If your fortunes are tied to one asset on the market, whether it be a company stock, a piece of property, or one business, you are at great risk of losing everything. If you plan on investing in property, either treat it like a full-time job or be prepared to keep reinvesting and growing your portfolio. Take properties in different markets or start investing the returns outside property altogether.
Property can be a great investment, but it can be a good deal more hands-on than the other options out there. Have a plan to keep building on your profits and know what you’re getting into.