Seven common mistakes property investors should avoid
By: James Newland
Many investors want to make it big in the real estate world, however only a small percentage will generate a good return on investment. Therefore, I’m going to help you out by sharing with you 7 of the most common mistakes that property investors tend to make, including hints and tips to overcome and generate revenue from residential properties.
1. Investment property should always be bought based on analytical research
Not only should a lot of questions be asked about the property, but also to enquire about the area (neighbourhood) in which it is located.
The following is a list of questions that investors should ask when looking to invest in a property:
- Is the property built in the vicinity of a commercial site, or will long-term construction be occurring in the near future?
- Does the property reside in a flood zone or in a problematic area?
- Does the house have foundation or permit issues that will need to be addressed?
- Are there any problem areas in town?
2. Buying the wrong property
Failing to research properties properly could result in investing the wrong property for your market audience. For example, the location you choose will have a huge impact in which property type you look to buy attracting either families or young professionals.
Therefore, know your market and buy accordingly.
3. Underestimating expenses
The best advice is to make a list of all of the monthly costs that are linked with running and maintaining a property (based upon estimates) before actually making a bid. Once those numbers are added up, you’ll have a better idea of whether you can really afford it.
Determining expenses prior to purchasing a property is even more important for investors. That’s because their profits are directly tied to the amount of time it takes them to purchase the home, improve it and resell it. In any case, investors should definitely form such a list. They should also pay particular attention to short term financing costs, prepayment penalties and any cancellation fees (for insurance or utilities).
Always account for any contingencies when it comes to investing, for example unexpected maintenance costs.
It is also beneficial to allow about 10% of the property’s value costs such as; land taxes, management and maintenance fees.
By underestimating your income and overestimating your expenses you’re more likely to avoid any unexpected issues.
4. Doing everything on your own
Many investors think by self-managing their portfolio; they will be able to find their own tenants and act as their own property managers by organising rent, maintenance, etc. and will reduce costs and increase profit margins.
In the short term, this might seem plausible, however when you are managing a portfolio of multiple properties of ten or more this might be a problem to manage such a large portfolio.
5. What will happen if you manage such a large property portfolio?
You will have to find and qualify suitable tenants, know the laws pertaining to renting, conduct regular inspections to ensure your tenants are looking after your asset, collect the rent, deal with all the maintenance issues that crop up and be on call 24/7 for your tenants.
6. What should you do instead?
Paying a professional property manager to handle the above items listed on your behalf will not only mean you get the best outcome for your rental property in terms of a good tenant and the best possible returns, it will also give you something just as valuable as money when it comes to investing time.
The time spent managing your properties could be put to far better use in finding new investments to add to your portfolio and by generating greater profits.
7. Overpaid on a property?
To avoid overpaying on a property, research should be conducted to find out exactly how much the property is worth. This can be time consuming but is vital to make sure that you are not being over charged.
When a prospective buyer finally finds a house that actually meets their needs, the buyer is naturally nervous to have the seller accept the bid.
The issue with being a nervous buyer could mean you could overbid on properties. Overbidding on a house can have a number of issues arise. Buyers may end up taking on too much debt and as a result could take years for the home buyer to regenerate this type of investment.
To find out what your potential property could be worth, start by searching what other similar homes in the area have sold for in recent months. Alternatively look at comparable homes in your local newspaper, and see what they are currently on the market for. The buyer should try to keep any bids consistent with similar home sales in the same area.
It’s just a matter of being patient in the searching process.