Learn from the mistakes of others when building your empire.
Before you go flying out to start your property portfolio you should understand there are a number of mistakes you could make as a new investor. There are also plenty of money-hungry crooks waiting eagerly to capitalise on your inexperience.
Here we'll go through the 10 most common mistakes made by new property investors.
1. Buying the wrong property
This is probably the mistake made most often by those new to investing in bricks and mortar. When you look at investment properties you need to view them as a landlord, not an owner. You need to consider whether it's attractive for people looking to rent rather than buy. Your personal tastes and desires shouldn't come into it.
A good rental property will be in a good location with useful travel links. It will have spacious rooms and should be relevant to the target market of the local area. Are you targeting families or single professionals?
2. Not doing your homework
A walk score can give a good indication of location and walkability for an investment property.
Buying a property without doing your homework is potential financial suicide. You need to look at the local rental market and find out who's renting property, how much they're paying for it and whether there's a big enough demand. What is the demographic of people in the area? Is it an area full of students and young professionals who might prefer a large apartment, or is it the perfect place for families to settle down?
Without looking into the facts and figures you could buy a property which is of no interest to the local pool of would-be tenants.
3. Underestimating your costs
It is very easy (and tempting) to underestimate the amount of time and money it will take to get your property fit for rental. This mistake leads to new investors running into serious cash flow problems. Get quotes for the work you need to do and multiply that figure by at least two. That way you have a buffer in case the work proves more expensive.
4. Having no spare funds
It's vital to have an "emergency fund" set aside for each of your investment properties. If an expensive repair is needed and you don't have the cash, you could end up getting the job done cheaply. This just leads to problems down the line and more worryingly angry tenants.
One of the best ways to build your emergency fund is to take some of your rental profit each month and get it paid into a completely separate account. Keep these funds away from your normal bank accounts and you won't be tempted to dip into it.
5. Not getting your finance right
The way you finance your investment property will go a long way towards determining your profitability. It's important to structure your property investment home loan in the most tax-effective manner. Many investors choose an interest-only home loan to minimise their repayments while maximising their tax-deductible debt. You can compare your home loan options in the table below.
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6. Rushing into decisions
Take the time to research potential properties, know the local market and be sure to interview a number of partner professionals before choosing who you want to work with. Remember the old saying "more haste less speed?" Well in property investment the saying is "more haste less profit!"
7. Investing from a distance
Don't be tempted to buy property a long distance from another state or even country unless you're prepared to travel to the site yourself. Setting up an investment property without seeing it with your own eyes is a recipe for disaster. If you do decide to buy out of the way make sure you've got a reliable estate agent to manage the property for you. Meeting them in person is also a must, regardless of where they're based.
8. Paying over the odds
Don't be fooled into thinking you can't make a low offer on an investment property. Remember your portfolio is a business and the idea is to make a profit. You don't know the position of the seller and they may be after a quick sale whatever the price. The worst that can happen is they say no and you try to negotiate.
Something you should always do when purchasing a property is ask for a "subject to finance clause." Your lender will want to value the property before they agree to give you finance, so this clause protects you in the event they don't agree with the purchase price.
9. Ignoring what your competition's doing
Don't overlook what other landlords in your area are doing. Find out how much they're charging for rent, how long it took them to find tenants and how are their properties presented. Also make a point to look at the adverts for properties in your area. What do they say and which papers are they in? You can get some very useful tips from studying the competition.
10. Not getting insurance
Going without a complete landlord insurance is a huge mistake. It covers you should something major go wrong with the property. A good policy will also cover you for lost rental income and will pay to rehome your tenants if your property is damaged and needs repairs.
As with any insurance cover make sure you read the fine print so you understand what's protected and what's not. The less you pay for cover the less protection you normally have.
Make sure you avoid making these property investment errors and you could be close to achieving a very satisfactory and profitable portfolio!
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Source: Mrs Mortgage